As filed with the Securities and Exchange Commission on December 1, 1999
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: Commission File No.:
June 30, 1999 000-28198
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
(Exact name of Small Business Issuer as specified in its charter)
Delaware 13-3754366
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) I.D. Number)
7 San Bartola Drive 32086
St. Augustine, Florida (Zip Code)
(Address of principal executive offices)
(904) 808-0503
(Issuer's telephone number including area code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, Redeemable Class A Warrants and Redeemable Class B Warrants
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for past 90 days.
Yes |X| No |_|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |X|
Issuer's revenues for the fiscal year ended June 30, 1999 were $1,119,482. The
aggregate market value of the common stock of the registrant, $.00025 par value
per share (the "Common Stock"), held by non-affiliates of registrant was
$151,024 as of September 21, 1999. As of October 1, 1999, the issuer had
outstanding 7,565,045 shares of Common Stock.
Documents Incorporated by Reference
None.
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Introductory Note
Conversion Technologies International, Inc., a Delaware Corporation (the
"Company" or "Conversion") is engaged in developing, manufacturing, marketing
and processing various substrates and advanced materials. As used herein, the
term Company includes each of the Company's subsidiaries, unless the context
otherwise requires.
This report on the Form 10-KSB (this "Report") contains forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), including, without limitation, statements
regarding the Company's cash needs and ability to fund its ongoing working
capital requirements, efforts to shift its focus away from the sales of its
abrasives to manufacture and sell, on a commercial scale, its decorative
particles and the possibility to out source ALUMAGLASS(R) production. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance, or achievements expressed or implied by such
forward-looking statements. See "Item 1. Description of Business - Risk Factors"
for a discussion of these risks. When used in this Report, statements that are
not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "anticipates," "plans,"
"intends," "expects" and similar expressions are intended to identify such
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date of this
Report. The Company undertakes no obligation to publicly release the result of
any revisions to these forward-looking statements that may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Part I
Item 1. Description of Business
Overview
For a discussion of certain recent developments concerning the Company and its
business, see "- Certain Recent Events."
The Company is engaged in the business of manufacturing and processing various
substrates and advanced materials that visually and texturally enhance
structural materials. These substrates and advanced materials include (i)
industrial abrasives which can be used for surface cleaning and surface
preparation applications such as in cleaning steel structures, railcars,
aircraft parts, and equipment in loose grain blasting operations; (ii)
decorative particles (exposed aggregates) that visually enhance structural
materials such as plasters, tiles, grouts, wall systems and roofing and
flooring; and (iii) performance aggregates which can be used as structural and
textural enhancers, fillers and additives, and to strengthen and add consistency
to materials such as cements, plasters, grouts, roofing and flooring, and glass
and ceramic materials. During the reporting period, the Company continued to
shift its focus away from industrial abrasives in favor of decorative particles
and performance aggregates due to the increased costs of production for
industrial abrasives relative to their market sales price.
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Until the second quarter of calendar 1998, the Company was also engaged in
recycling cathode ray tube ("CRT") glass produced in the manufacture of
televisions for resale to television manufacturers and others, which business
accounted for approximately 65% of the Company's revenues for the year ended
June 30, 1998. In March 1998, as part of the shift in the Company's focus, the
Company agreed to subcontract its recycling operations to Dlubak Glass Company
("Dlubak"). See "Products-Recycled CRT Glass." The phase out of its CRT
recycling operations resulted in a decline in the Company's CRT revenues during
the fourth quarter of fiscal year 1998 when the Company commenced its
subcontracting arrangement with Dlubak, and such revenues have continued to
decrease during the first two quarters of fiscal 1999 and stopped thereafter.
The Company was incorporated in June 1993 for the purpose of acquiring Dunkirk
International Glass and Ceramics Corporation ("Dunkirk"), and conducted no
business activities prior to such acquisition. The Company acquired Dunkirk in
August 1994 pursuant to a merger in which holders of the common stock of Dunkirk
received Common Stock of the Company. Prior to such acquisition, Dunkirk was a
development stage company, principally engaged in the construction of its
manufacturing facilities and initial CRT glass recycling efforts. The Company
currently owns one hundred percent of the issued and outstanding shares of
Dunkirk.
Advanced Particle Technologies, Inc. ("APT"), also a wholly-owned subsidiary of
the Company, was formed in October 1996 by the Company and a former joint
venture partner for the purpose of applying color coatings to particles. In June
1997, the Company purchased all of its former joint venture partner's 50%
interest in APT.
The Company's industrial abrasives and construction material substrates include
ALUMAGLASS(R), an alumino-silicate glass produced in a patented process
utilizing industrial waste streams and certain virgin materials, as well as
other glass and fired ceramic materials produced using the Company's
manufacturing equipment. ALUMAGLASS(R) was introduced in 1995, but has generated
only minimal sales to date. Although the Company intends to continue to market
ALUMAGLASS(R), in the fall of 1996 the Company shut down the melter used to
manufacture ALUMAGLASS(R) at its Dunkirk, New York facility (the "Dunkirk
facility"). The Company does not intend to restart the melter in the foreseeable
future. The melter was shut down after a significant inventory of material had
been produced and after determining that the cost of production was too high
relative to the market sales price for ALUMAGLASS(R). The Company is currently
satisfying limited orders for ALUMAGLASS(R) from inventory.
The Company's decorative particles include CERAMAGLASS(R) and CERAMAQUARTZ(R).
In 1996, the Company constructed a semi-works, low-volume production facility in
St. Augustine, Florida (the "St. Augustine facility") to produce these
materials. Market introductions of these products were made concurrently with
construction. The St. Augustine facility began operating in the spring of 1997
and the Company began accepting orders for production level quantities in June
1998. Although preliminary evaluations of the production facility indicate that
product quality, production costs and capacity are within all design parameters,
there can be no assurance that under long term production runs these parameters
will be maintained at levels satisfactory to the Company.
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The Company's performance aggregates, fillers and enhancers are currently
produced in the Company's St. Augustine facility. Market introductions of
fillers and enhancers were made in St. Augustine concurrently with construction
of the St. Augustine facility. The Company began accepting orders for production
level quantities of these products in May and June 1998. Although preliminary
evaluations indicate that the product quality, cost of goods produced and
through put and capacity are within all design parameters, there can be no
assurance that under long term production runs these parameters will be
maintained at levels satisfactory to the Company.
Products
Abrasives
The Company's industrial abrasives include ALUMAGLASS(R) and other glass and
ceramic formulation materials, marketed as VISIGRIT(TM) and GREAT WHITE(TM). The
Company ceased production of industrial abrasives in October 1998, and the
Company's current limited sales are made from remaining inventory. As loose
grain abrasives, these industrial abrasives can be applied with blasting
equipment for industrial cleaning and maintenance and manufacturing operations.
Potential purchasers of the Company's remaining inventory of industrial
abrasives include military and defense agencies, entities engaged in the
electronics, aerospace, automotive, glass products and construction industries
and entities engaged in surface finishing, coating removal and maintenance of
manufacturing and processing equipment, buildings, highways, bridges and
commercial vehicles and vessels.
In January 1998, the Company entered into a letter agreement with Ormet Primary
Aluminum Corporation ("Ormet"), a producer of aluminum foil, whereby Ormet would
employ its production facility in Hannibel, Ohio to formulate and produce
ALUMAGLASS(R) which would then be crushed and screened in the Dunkirk
manufacturing facility. Although the Company continues to be in discussions with
Ormet, there can be no assurance that a formal agreement will be entered into on
terms satisfactory to the Company, or at all, or that there will ever be
significant sales of ALUMAGLASS(R).
Decorative Particles
The Company's St. Augustine facility color coats various glass substrates to
produce decorative particles. Decorative particles are widely used in the
construction industry to visually enhance structural materials such as plasters,
tiles, grouts, wall systems and roofing and flooring. Decorative particles are
also incorporated into countertops and cabinetry. The Company believes that its
proprietary color coating process yields a coating of superior visual quality
and endurance compared to competing products and believes that there is a
potential market for these products.
Performance Aggregates
ALUMAGLASS(R) and the Company's other glass and ceramic products, individually
or in blended combinations, can also be used as structural or textural
enhancers, fillers and additives. These products, which can be sized according
to industry standards, can be used to strengthen and add consistency to
materials such as cements, plasters, grouts, mortars, roofing and flooring and
other glass and ceramic materials.
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Recycled CRT Glass
During fiscal 1998, the Company had engaged in the recycling of CRT glass used
in televisions. In March 1998, the Company entered into a letter agreement with
Dlubak (the "Dlubak Letter Agreement") which outlined the fundamental terms of a
subcontract arrangement. Although the Company and Dlubak have not entered into a
formal contract, the parties have been operating on the basis of such
subcontract arrangement. The Dlubak Letter Agreement provides, among other
things, that (i) the Company will subcontract the processing of its CRT glass to
Dlubak for a five-year period; (ii) the Company will receive royalties of
$20-$28 per ton of glass processed by Dlubak; (iii) Dlubak will purchase from
the Company glass cullet (glass tube pieces) inventory and other waste
materials, (iv) Dlubak has the option to rent certain space at the Company's
Dunkirk facility for processing CRT glass; (v) at the end of the five year
period, the Company is required to sell its glass cullet processing equipment to
Dlubak for one dollar ($1) and at that time Dlubak has the option to purchase
the Dunkirk facility. Under the Dlubak Letter Agreement, Dlubak agreed to assume
the Company's obligations under two promissory notes in the aggregate principal
amount of $250,000 issued by the Company to two of its customers (although the
Company was not released of its obligations thereunder). This agreement was
designed to provide the Company with a nominal positive cash flow for every ton
of CRT material processed by Dlubak at the Dunkirk facility and to reduce the
deferred revenue and disposal liability that had been previously recorded in the
Company's financial statements. Since the Company has ceased operations at
Dunkirk, Dlubak has failed to make installments on the assumed promissory notes
to the two customers. See " Certain Recent Events."
Manufacturing and Recycling Processes
Through October 1998, the Company crushed and screened its abrasives and
performance aggregate products at its Dunkirk facility. The Company utilized its
equipment, principally its post-melting, abrasives finishing equipment, to sort,
clean and/or grind and crush the material into the desired form. The material
was then packaged and shipped to customers. Currently the Company is not
crushing and screening the material but is using its existing inventory to fill
customer's orders.
The Company's St. Augustine facility is used to color coat and package
decorative particles and performance aggregates. The proprietary manufacturing
process consists of applying various pigments and other coating materials in a
thermodynamic process to particles that are purchased locally or supplied by
customers. The material is then packaged on site and shipped to customers.
Research and Development
The Company has temporarily curtailed its research and development efforts until
the Company can achieve an acceptable return on equity for its existing
products. The Company has an on-site laboratory at its St. Augustine facility
where various analyses, tests and other research and development activities can
be conducted. The Company maintains a relationship with the Center for Advanced
Ceramic Technology ("CACT") at Alfred University for any additional research and
development needs. CACT is the Company's primary outside research and
development partner, and works on various matters from time to time as requested
by the Company. In December 1998, the Company entered into a consulting
agreement with 4C Technologies, Inc. for research and development of new plaster
products on an as needed basis.
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Although the Company's research and development activities are presently
limited, the Company plans to continue to engage in research and development
activities from time to time. It is anticipated that such efforts will be
focused in the near term on ALUMAGLASS(R) licensing possibilities and expanding
color coating markets for the Company's decorative particles.
Markets for Products and Services
Abrasives
A variety of media and methodologies have traditionally been used as industrial
abrasives. In particular, sand used in blasting applications and chemical
solvents have held a significant share of the market. In recent years, however,
increased regulations relating to the environment and worker health and safety
have resulted in a dramatic decline in the use of sand, which is known to
contribute to the lung disease silicosis. In addition, given the greater demand
for reclaimable abrasives, which reduce the amount of spent abrasive material
subject to landfill and potential environmental liability, the Company believes
that non-reclaimable abrasives, such as sand and metal slags, are competitively
disadvantaged. The use of chemical solvents in many applications has also
decreased due to regulatory changes, particularly regulations which have
resulted in increased disposal costs. Products such as ALUMAGLASS(R), glass
beads and mineral, metallic and plastic abrasives are less affected by such
regulations due to the nature of their composition, the fact that they are
reclaimable for multiple uses, and have a lower quantity for disposal.
ALUMAGLASS(R), for example, does not contain free silica, which causes
silicosis, and, depending on the application, could potentially be recycled
rather than disposed of after use. Other approaches such as high pressure water
and dry ice blasting are also gaining acceptance as industrial abrasives.
Loose grain abrasives, typically applied with blasting equipment, are used in
numerous industries throughout the world for equipment and facilities
maintenance. Applications include cleaning, stripping and other surface
treatment or surface preparation applications, such as industrial metal
finishing, coating removal, structural steel and commercial vehicle cleaning,
paint removal and the cleaning and preparation of surface substrates. Potential
purchasers include utilities, military and defense agencies, entities engaged in
the electronics, aerospace, automotive, glass products and construction
industries and entities engaged in surface finishing, coating removal and the
maintenance of manufacturing and process industries equipment, facilities,
buildings, highways, bridges and commercial vehicles and vessels.
Decorative Particles
The Company believes that there is a large market for decorative particles. End
users for decorative substrates or particles include ceramic tile manufacturers,
producers of swimming pool plasters, decorative roofing and wall systems,
pottery and porcelain producers and others.
The production of plasters, mortars, terrazzo, and ceramic tiles requires large
quantities of fillers and expanders. While crushed marble, white sand, kaolin or
similar low cost white calcium based materials have traditionally been used as
fillers and expanders, the high cost of coloring agents, pigments and the
process to coat substrates makes it non-economical to color coat large volumes
of these fillers. As a substitute, the construction industry adds small
quantities of previously color coated particles into the fillers. The resulting
mixture, when viewed over a large surface area and from a distance, appears to
have a consistent color or hue.
The Company believes that market acceptance of colored particles is largely a
function of the brilliance
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and endurance of the color, which results from the level of translucence or
reflectivity of the substrate. In most applications, the coated surface of a
particle is subject to erosion. Consequently, colored substrates must have
translucent properties in order to maintain their color characteristics with a
translucent or clear particle, in order to ensure that as the color is eroded
from the exposed surface of the particle embedded in the mortar or plaster, the
color on the back side of the particle will remain visible, thereby extending
the life of the color application significantly. Traditionally quartz and high
quality silica sands have been used as substrates to produce translucent colored
particles. The Company believes that its proprietary coating process will
produce a coating of superior endurance and visual appeal.
Performance Aggregates
The Company believes that there is a large market for performance aggregates.
Materials such as plasters, mortars, terrazzo, flooring tiles, and other ceramic
or cement based mixtures require fillers, expanders or particulates that will
add consistency or texture for functional purposes. The Company has the ability,
if necessary, to size its aggregates within narrow specifications for specialty
applications. The Company has only recently begun to explore the use of its
various substrates for this market. The Company believes that its fired ceramic
substrates will also have applicability in these markets, particularly as filler
for tiles and plasters. The Company further believes that because many of its
substrates are produced from waste material, it may have production cost
advantages over certain materials traditionally used in this market, such as
mined substrates.
Recycled CRT Glass
The Company had engaged in the recycling of CRT glass. In March 1998, the
Company subcontracted its CRT glass recycling business to Dlubak and the Company
currently generates only nominal revenues from this arrangement. The Company
does not anticipate that Dlubak will be expanding this business activity because
of the relatively few television manufacturers located in the United States, the
relatively low percentage of CRT glass that becomes waste prior to being
incorporated into televisions and the shipping costs associated with doing
business with manufacturers located at significant distances from the Company.
Currently there is a disagreement with Dlubak for the amounts owed to the
Company, which might result in future litigation.
Dependence on Certain Customers
The Company has a limited number of customers for all its products. For the year
ended June 30, 1999 ("fiscal 1999"), 57.9% of the Company's revenues was derived
from two major customers. Revenue generated from each of these customers
amounted to $382,622 and $265,792, which represents 34.2% and 23.7% of the total
revenue, respectively.
The customer base for abrasives, decorative particles and performance
aggregates, though still limited, is not as concentrated as the recycled CRT
business. In its abrasives business, the Company's main customer, N.T. Ruddock &
Company, accounted for 3.6% of the Company's total revenue, while the Company's
main purchaser of decorative particles, Southern Grouts and Mortars Inc.
("SGM"), accounted for 34.2% of the Company's total revenue.
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Sales and Marketing
The Company's abrasive products have been marketed and distributed in the United
States primarily through distributors and limited direct sales efforts by the
Company. N.T. Ruddock & Company, Fusco Abrasive Systems, Inc., Standard Sand &
Silica Co. and Porter Warner Industries, Inc. are regional distributors of the
Company's abrasives and are large-volume distributors of loose grain abrasives
in the United States. The Company has also established relationships with
distributors in the United Kingdom, Canada, Mexico, China and Israel. The
Company currently employs one individual who is dedicated to sales and marketing
and also uses its management team to support the sales and marketing effort. The
Company's marketing strategies include, among others, telemarketing, direct mail
and trade journal advertising, product sampling programs and customer support
programs, such as technical assistance programs and testing support.
To date, the Company's efforts through distributors have failed to generate
significant sales of ALUMAGLASS(R). Accordingly, the Company plans to explore
joint ventures and other corporate teaming efforts to increase outlets for
ALUMAGLASS(R), which may include product bundling or composite production. The
Company also intends to review and evaluate its distributor relationships and
incentives as well as its direct sales initiatives. There can be no assurance,
however, that such efforts will be successful.
After the termination of the distributor agreement with VANGKOE Industries Inc,
("VANGKOE") (covering decorative particles) in May 1998, the Company initiated a
direct sales and marketing effort which targeted select manufacturers of
swimming pool plasters and decking materials in the Southeastern United States.
Intellectual Property
The Company has been granted two United States patents. The first patent was
issued in December 1993 and relates to the Company's process for manufacturing
abrasive particles from inorganic waste materials, including sludges from
various industrial processes and waste water treatment, emission control dusts
from high temperature industrial processes, fly ash from incineration of
industrial and residential wastes and certain other process specific effluents.
Examples of such inorganic wastes are: spent pot liner from the aluminum
industry, refractory wastes from smelting, melting or refining furnaces, various
types of slags and precipitants related to metal recovery operations, foundry
sands, glass wastes, including television and computer monitor CRT glass, and
certain wastes from the manufacture of ceramic products. The Company's second
patent was issued in October 1995 and relates to the pre-melting batching
process involved in the manufacture of the Company's abrasives. In addition, the
Company has filed jointly with another party an application for a U.S. patent on
the X-ray fluorescence technology that has been used in the Company's CRT glass
recycling operations. The Company has three additional patent applications on
file. These patent applications relate to ALUMAGLASS(R) and to the use of the
Company's products as aggregates in construction materials. The Company's logo
and ALUMAGLASS(R) are registered trademarks.
In connection with the agreement to terminate the distribution agreement with
VANGKOE, the Company purchased the trademarks for CERAMAGLASS(TM) and
CERAMAQUARTZ(TM) from VANGKOE for the sum of $50,000.
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Competition
The Company's products and services are subject to substantial competition. The
Company's abrasives compete with product offerings of other companies,
principally aluminum oxide, glass beads, plastic abrasives, garnet, steel grit,
coal slag and, with respect to certain applications, sand or water blasting
techniques. Many of the companies offering such products are large corporations
with substantially greater financial resources than the Company. Large
international competitors of manufactured metallic abrasives include:
Exolon-ESK, General Abrasives Triebacher, Inc., Washington Mills Electro
Minerals Corp., Irvin Industries, Inc., Norton/St. Gobain and others. Various
other manufacturers produce mined, plastic, glass bead and mineral abrasives, as
well as high speed water jet spray abrasive systems. The Company's ability to
effectively compete against these companies could be adversely affected by the
ability of these competitors to offer their products at lower prices than the
Company's products and to devote greater resources to the marketing and
promotion of their products than are available to the Company.
The Company's decorative particles and performance aggregates will also face
substantial competitive pressures. The Company believes that Minnesota Mining
and Manufacturing Company ("3M") has a significant share of the market for
decorative particles. 3M has available to it financial, technical and other
resources far superior to those of the Company. In addition, certain customers
of other products may be unwilling to switch to the Company's particles due to
factors such as personal preferences for a competitor's color selections,
consistency with colors previously sold, performance concerns or satisfaction
with its current products. The Company's performance aggregates will face
similar competitive pressures from producers of mined minerals, aluminum oxide
and other abrasives. These producers include 3M and Norton/St. Gobain, each with
resources superior to those of the Company. There can be no assurance that the
Company can stay in business in the face of strong competition from various
manufacturers with such advantages.
Environmental Matters
The federal environmental legislation and policies that the Company believes are
applicable to its manufacturing operations include the Comprehensive
Environmental Response, Compensation and Liability Act of 1978, as amended
("CERCLA"), the Resource Conservation and Recovery Act of 1976, as amended
("RCRA"), the Clean Air Act of 1970, as amended, the Federal Water Pollution
Control Act of 1976, as amended, the Superfund Amendments and Reauthorization
Act ("SARA") and the Pollution Prevention Act of 1990. The Company is also
subject to state air, water and solid and hazardous waste laws and regulations
that affect its manufacturing operations.
To maximize market acceptance of the Company's manufacturing technology, the
Company chose to focus its initial efforts on the development of recycling
processes, materials and products which are most likely to qualify for
exemptions or favorable regulatory treatment. For example, the Company used
materials that are not solid wastes and are not subject to RCRA permitting
requirements (as an example, reclaimed characteristically hazardous by-products
or sludges). The Company handled secondary materials in a manner that allows
such materials to qualify for exclusions under state or federal RCRA regulations
(for example, use of materials as effective substitutes for other products in a
manufacturing process), and the Company stored materials in an environmentally
sound manner (for example, within the manufacturing building or on a concrete
slab).
The New York State Department of Environmental Conservation ("NYSDEC") has been
delegated authority to administer the RCRA program in New York, and has adopted
regulations governing the treatment, storage and disposal of solid and hazardous
wastes. NYSDEC regulations require the
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Company to obtain regulatory exemptions and/or beneficial use determinations for
each hazardous waste material it accepts for recycling purposes. Without these
regulatory exemptions and/or beneficial use determinations, the Company would be
required to obtain a state RCRA permit to operate its facility, and would become
subject to onerous RCRA regulatory requirements.
CERCLA and subsequent amendments under SARA impose continuing liability upon
generators of hazardous substances and owners and operators of facilities where
hazardous waste is released or threatened to be released, as well as upon
parties who arrange for the transportation of hazardous substances to such
facilities. CERCLA effectively imposes strict, joint and several liability upon
these parties. Accordingly, although the Company strives to operate its
facilities in compliance with regulatory requirements, there can be no assurance
that the Company will not incur liability as an owner or operator for releases
of hazardous substances, or possibly as a hazardous waste generator.
During fiscal 1999, the Company was carrying a potential environmental liability
on its books which was caused by unprocessed materials at its Dunkirk facility.
This liability was reduced in fiscal 1999 as a result of an agreement that the
Company entered into with Dlubak which, in part, required the removal of all
inventory of unprocessed CRT materials from its Dunkirk facility which was
completed in November 1998. The Company intends to further reduce the liability
if and when it can decrease the quanities of the remaining unprocessed waste
materials on hand. In December, 1998, the Company was notified by NYSDEC that a
remedial plan needs to be submitted regarding the completion of its petroleum
storage tank removal project. The Company submitted its sampling plan and
analysis results to the NYSDEC and received a reply that NYSDEC does not require
any further remedial work at this time.
Employees
As of October 1, 1999, the Company had 12 full-time employees consisting of 9
employees in manufacturing and 3 employees in finance and administration. None
of the Company's employees are subject to a collective bargaining agreement and
the Company has not experienced any work stoppages, nor to the Company's
knowledge, are any threatened.
Certain Recent Events
New Management
There have been a number of management changes. In September 1998, Mr. David R.
Walner who was elected a director in March 1998, resigned as a director. In
October 1998, Stephen R. Archer, who had been hired in August 1998 as Vice
President, Sales and Marketing - Industrial Materials, resigned. In October
1998, William L. Amt and Gary Jellum resigned from their positions as President
and Chief Executive Officer and Vice President of Administration, respectively.
Eckardt C. Beck, who continues to act as the Company's Chairman of the Board,
has been serving as Acting President and Chief Executive Officer of the Company
since October 1998.
Private Placement
On September 24, 1999, the Company sold in a private placement (the "Private
Placement") to accredited investors 4,802,967 shares of Series B Convertible
Preferred Stock (the "Series B Preferred") with a par value of $.001 per share
and a stated value of $0.60 per share. Each share of the Series B Preferred is
convertible into twenty shares of Common Stock at a conversion price of $0.03
per share. The Company accepted $1,115,000 in cash and cancellation of debt and
accrued interest in the amount of $1,767,000
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as consideration for the sale of the Series B Preferred. Of the total debt
cancelled in exchange for the Series B Preferred, $1,653,000 was from the Aries
Domestic Fund, L.P. and The Aries Fund, a Cayman Island trust (collectively, the
"Funds"), who converted all of the debt and accrued interest owed to them under
the Senior Secured Line of Credit Agreement (as amended, the "Credit Agreement")
and certain interim financing. See "Certain Relationships and Related
Transactions". The Funds now own shares of Series B Preferred which is
convertible into shares of Common Stock of the Company as stated above.
Other Changes to Indebtedness
Dunkirk was obligated with respect to $1,888,000 outstanding aggregate principal
amount of equipment term notes made by Dunkirk to Key Bank of New York ("Key
Bank") in December 1994 and January 1995, which were guaranteed by the Empire
State Development Corporation/Job Development Authority (the "ESDC"). In July
1997, the ESDC agreed to honor its guarantee of such equipment term loans (in
full) and in December 1997 the ESDC paid such guarantee (in full) and Key Bank
assigned such notes to the ESDC. In connection with the assignment of the notes
to ESDC, the ESDC agreed to defer all interest and principal payments due under
the loans through July 1, 1998 until the maturity date of the notes, with
interest continuing to accrue on such deferred amounts payable at maturity. On
December 2, 1997, the ESDC forgave $500,000 in principal amount of the debt.
Also, the balance of the related debt service fund of $459,000 was applied
against outstanding principal and accrued interest, resulting in a principal
balance (after debt forgiveness) of $1,032,798. On June 22, 1998, the ESDC
agreed to defer principal payments due under the loan through January 1, 1999
until the maturity date of the note. From the cash proceeds of the Private
Placement, the Company paid $600,000 to ESDC in full satisfaction of the
equipment term note assumed from Key Bank with an adjusted principal balance of
$1,183,110 and also another Dunkirk subordinated note due ESDC with a principal
balance of $37,870. In consideration for this payment made by the Company, ESDC
agreed to assign the related security interests to the Company.
Amendment to Certificate of Incorporation
On September 24, 1999, the Company's Certificate of Incorporation was amended to
increase the number of shares of Common Stock it is authorized to issue from 50
million to 200 million.
Illiquid Position
The Company does not currently possess sufficient funds to conduct its business
and satisfy its liabilities. The Company has significant past due payables and
is in default in payment of principal and interest on substantially all of its
indebtedness for borrowed money. The Company is currently seeking additional
financing through the sale of certain equipment located at its Dunkirk facility.
There can be no assurance that the Company will be able to obtain necessary
financing. If the Company is not able to obtain financing, the Company may be
forced to further limit or even cease operations.
Risk Factors
As described in the "Introductory Note," certain statements made herein that are
not historical are forward-looking within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements involve known
and unknown risks and uncertainties. Many factors could cause the actual
results, performance or achievements of the Company to be materially different
from any future statements, including, among others, those described below.
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Accumulated Deficit; History of Operating Losses; Going Concern Paragraph in
Auditor's Report
The Company has experienced significant operating losses since its inception.
The Company had an accumulated deficit of approximately $(38,290,000) at June
30, 1999. The Company incurred an operating loss of approximately $(1,638,000)
for the fiscal year ended June 30, 1999, and approximately $(8,442,000) for the
fiscal year ended June 30, 1998. As a result, the Company has experienced a
deficiency in cash flows from operations. Such losses have resulted principally
from limited revenues from operations and costs associated with the development
of the Company's technologies, general and administrative expenses and a number
of large one-time, non-cash charges to operations. The Company expects to incur
a substantial loss for the fiscal year ending June 30, 2000 and to continue to
incur operating losses until such time, if ever, as product sales generate
sufficient revenue to fund the Company's continuing operations. The Company
received an explanatory paragraph in the report of its independent auditor
accompanying its consolidated financial statements for the fiscal years ended
June 30, 1999 and 1998, indicating that there is substantial doubt as to the
ability of the Company to continue as a going concern. No assurance can be given
that the Company will ever achieve profitable operations.
Need for Additional Financing; Possibility of Bankruptcy
The Company is in need of significant additional financing. At June 30, 1999,
the Company had a net working capital deficiency of approximately $5,072,000.
The Company presently has large past due payables and is in default on principal
and interest payments with respect to substantially all of its indebtedness for
borrowed money. The Company's limited cash resources have strained relations
with suppliers and trade creditors and have caused certain suppliers to provide
products and services only on a cash basis. The Company's creditors, whether
lenders or trade creditors, could commence suit to enforce their debts (and
certain creditors have commenced litigation) or could force the Company into
bankruptcy. In the event of a bankruptcy, unless there are assets available
after the satisfaction in full of the claims of creditors, there will be no
recovery by the holders of equity. Furthermore, the Company's default on
indebtedness entitles the lenders to accelerate their debt, liquidate their
collateral and otherwise pursue the rights and remedies available to them
pursuant to applicable law and their loan documents. The Company has no
commitments or other arrangements for any future financing and there can be no
assurance that any debt or equity financing will be available within the needed
time frame. Furthermore, the Company's Certificate of Incorporation and the loan
documents to which the Company is a party restrict its ability to incur
additional debt. Any equity financing will be dilutive to the Company's
stockholders and any debt finances will likely contain restrictive covenants and
additional debt service requirements, which could adversely affect the Company's
operating results. If the Company is not able to obtain additional financing,
the Company may be required to significantly limit or even cease operations.
Substantial Indebtedness; Payment Defaults; Potential Loss of Collateral
At June 30, 1999, the Company had outstanding an aggregate of approximately
$2,514,000 of indebtedness (excluding amounts borrowed under the Line of Credit,
certain interim financing and capital lease obligations), substantially all of
which is secured by the assets of its wholly-owned subsidiary Dunkirk.
Accordingly, the Company is subject to all of the risks associated with
substantial indebtedness, including the risk that cash flow may not be
sufficient to make required payments of principal and interest on indebtedness.
To the extent that substantially all of the Company's assets continue to be
pledged, such assets will not be available to secure additional indebtedness,
which may adversely affect the Company's ability to borrow in the future. Of the
Company's $2,514,000 in indebtedness at June 30, 1999, $1,508,628 was principal
owed to the ESDC. On June 22, 1998, the ESDC agreed to defer principal payments
due under the loans through January 1, 1999 until the maturity date of the
notes. The Company has negotiated with the ESDC and paid on September 24, 1999 a
reduced amount of $600,000 as a payment in full of all amounts owed on two of
the loans which had a principal balance of $1,220,980. The
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Company is currently in default with respect to principal and interest payments
on the remaining ESDC loan with a principal balance of $287,648. In the event
that the Company is unable to reach a settlement with the ESDC with respect to
the Company's repayment of debt to the ESDC, ESDC, as a secured party, may be
able to force a sale of the property located at the Dunkirk facility which
secures the debt. In addition, most of the Company's indebtedness is subject to
various covenants. In the event of a default in payment of outstanding
indebtedness (such as currently exists), or in the event of a default arising
out of a violation of any covenants, the Company, APT and/or Dunkirk may lose
all or a portion of its assets and the Company, APT and/or Dunkirk may be forced
to materially reduce its business activities or cease its operations. Certain of
the instruments governing the Company's indebtedness also contain default
provisions relating to insolvency and the inability to pay debts as they become
due. See "Certain Relationships and Related Transactions."
Limited Revenues and Product Sales; Lack of Profitable Business; New Business
The Company presently lacks a profitable business initiative. The Company
commenced recycling CRT glass used in the manufacture of televisions in 1994 and
production of industrial abrasives in 1995. Substantially all of the Company's
limited revenues through fiscal year 1998 were derived from recycling CRT glass;
however, the Company has phased out its CRT recycling operations. Additionally,
the Company has generated only minimal revenues to date from sales of
ALUMAGLASS, its initial industrial abrasive product, which has received limited
acceptance in the marketplace. The Company has recently commenced production of
certain other glass and fired ceramic substrates and decorative particles that
visually embrace structured materials, which were substantially all of the
Company's revenue in fiscal 1999; however, there can be no assurance that these
products will generate significant sales. While attempting to commercialize its
products, the Company is subject to risks inherent in a new business generally,
such as marketing problems, unanticipated problems relating to environmental
regulatory compliance, manufacturing and the competitive environment in which
the Company operates, and additional costs and expenses that may exceed
estimates. There can be no assurance that, even after the expenditure of
substantial funds and efforts, the Company will ever achieve or maintain a
substantial level of sales of its products.
Limited Sales of ALUMAGLASS; Shutdown of Melter; Uncertain Market Acceptance
To date, the Company has had only minimal sales of ALUMAGLASS. The Company has
shut-down the melter used to manufacture ALUMAGLASS and is currently satisfying
limited orders through existing inventory made from raw materials purchased from
a third party which the Company has processed into finished ALUMAGLASS. If
market demand for ALUMAGLASS warrants further ALUMAGLASS production, the Company
would seek to purchase the raw ALUMAGLASS particles and process the material for
resale to its customers. Although the Company is currently in discussions with
one such source, there can be no assurance that such arrangements will be
consummated on terms satisfactory to the Company, or at all, or that there will
ever be significant sales of ALUMAGLASS. There can be no assurance that
ALUMAGLASS will ever obtain market acceptance. In addition, the Company has only
recently commenced production of its other glass and fired ceramic materials,
and there can be no assurance that these products will obtain market acceptance.
Cancellation of Indebtedness; Possible Tax Effects
Due to certain debt forgiveness, the Company had a number of significant net
pretax gains during fiscal 1998. These net pretax gains could result in
significant tax obligations. The Company does not have sufficient working
capital to satisfy any such obligations. See "Notes to Consolidated Financial
Statements - Item 2 - Extraordinary Items." While the Company does have certain
loss carry forwards, the Company cannot be certain at this time whether the loss
carry forwards are usable to offset any of the Company's gains.
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New Management; Dependence on Key Personnel
The Company is and will be dependent on its key management personnel, Eckardt C.
Beck, Acting President and Chairman of the Board, and John Murchie, Chief
Financial Officer. There can be no assurance that such individuals will be able
to successfully implement the Company's strategies or that such individuals will
remain with the Company. The loss of one or more of these individuals could have
a material adverse effect on the business and operations of the Company. In
addition, the Company will need to attract and retain other qualified
individuals to satisfy its personnel needs. There can be no assurance that the
Company will be successful in retaining its key management personnel or in
attracting and retaining new employees.
Limited Sales and Marketing Experience
The Company has had limited experience in selling and marketing its products.
Furthermore, the Company has assembled only a small sales and marketing
organization. There can be no assurance that the Company will be able to
recruit, train or retain qualified personnel to sell and market its products or
that it will develop a successful sales and marketing strategy. In addition, for
certain applications, the Company has relied on distributors for primary
marketing efforts, which has resulted in only limited sales of ALUMAGLASS. In an
effort to achieve market acceptance of its products, the Company may seek to
enter into joint ventures, licensing or other collaborative arrangements to sell
and market its products. There can be no assurance that any sales and marketing
or other efforts undertaken by the Company will be successful.
Competition
The Company's products and services are subject to substantial competition. See
"Competition" for a detailed description of the competition that the Company
faces.
Dependence on Patents and Proprietary Technology; Risk of Infringement of
Third-Party Patents
The Company's success will depend, in part, on its ability to maintain
protection for its products and manufacturing processes under United States and
foreign patent laws, to preserve its trade secrets and to operate without
infringing the proprietary rights of third parties. The Company has two issued
U.S. patents and two U.S. patent applications pending. There can be no assurance
that any patent applications will result in issued patents, that any issued
patents will afford adequate protection to the Company or not be challenged,
invalidated, infringed or circumvented or that any rights thereunder will afford
competitive advantages to the Company. Furthermore, there can be no assurance
that others have not independently developed, or will not independently develop,
similar products and technologies or otherwise duplicate any of the Company's
products and technologies.
Dependence on Environmental Regulation/Regulatory Status of Facilities
Federal, state and local environmental legislation and regulations mandate
stringent waste management and operations practices, which require substantial
capital expenditures and often impose strict liabilities for non-compliance.
Environmental laws and regulations are, and will continue to be, a principal
factor affecting demand for the technology and services being developed or
offered by the Company. Additionally, the Company and its customers operate in a
highly regulated environment and the St. Augustine facility is and any future
facilities may be required to have various Federal, state and/or local
government permits and authorizations, registrations and/or exemptions.
Potential Environmental Liability
The Company's business exposes it to the risk that harmful substances may be
released or escape into the environment from its facilities, processes or
equipment, resulting in potential liability for the resultant
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exposures, clean-up or remediation of the release, and/or potential personal
injury associated with the release. Liability for investigation and/or clean-up
and corrective action costs exists under the Comprehensive Environmental
Response, Compensation and Liability Act, the Resource Conversation and Recovery
Act, the New York State Environmental Conservation Law, and the Florida Air and
Water Pollution Control Act. Additionally, the Company is potentially subject to
regulatory liability for the generation, transportation, treatment, storage or
disposal of hazardous waste if it does not act in accordance with the
requirements of Federal or state hazardous waste regulations or facility
specific regulatory determinations, authorizations or exemptions. The Company is
also potentially subject to regulatory liability for releases into the air or
water under the Clean Air Act, the Clean Water Act and analogous state laws and
regulations, and various other applicable Federal or state laws and regulations.
Potential Conflicts of Interest Arising from Certain Related Party Transactions
The Company has entered into consulting agreements with Mr. Beck, and with
certain principal stockholders and affiliates of certain directors and principal
stockholders of the Company, pursuant to which, among other things, certain of
such persons received warrants and pursuant to which certain of such persons
will be entitled to receive success fees upon the completion of certain project
development activities. Such agreements may result in conflicts of interest for
the directors and principal stockholders who are, or whose affiliates are,
parties to such consulting agreements. The Company, however, does not believe
that the existence of such agreements will interfere with the ability of the
Company's directors to discharge their fiduciary duties to the Company's
stockholders. See "Certain Relationships and Related Transactions".
Outstanding Warrants, Options and Convertible Securities
As of October 1, 1999, the Company had outstanding 514,930 shares of Series A
Convertible Preferred Stock convertible into 10,298,600 shares of Common Stock
at a conversion price of $0.50 per share and 4,802,967 shares of Series B
Convertible Preferred Stock convertible into 96,059,340 shares of Common Stock
at a conversion price of $0.03 per share.
Also as of October 1, 1999, the Company had outstanding (i) 18,329,095 warrants
to purchase an aggregate of 18,329,095 shares of Common Stock at exercise prices
ranging from $0.66 to $5.28 per share; (ii) options to purchase an aggregate of
1,052,257 shares of Common Stock at exercise prices ranging from $0.03 to $6.16
per share; and (iii)non-qualified options to purchase 36,293,101 shares of
Common Stock at an exercise price of $0.03 per share (consisting of options to
purchase 18,146,550 shares issued to Mr. Beck, options to purchase 10,434,267
issued to five other directors of the Company, options to purchase 1,360,991
issued to one other officer of the Company and options to purchase 6,351,293
issued to two managers of the Company) which are not part of any of the
Company's option plans. See "Certain Relationships and Related Transactions".
Also, the Company had outstanding warrants to purchase 61,945 shares of Series A
Preferred Stock at a per share exercise price of $9.82. The Company has reserved
an aggregate of 690,000 shares of Common Stock for issuance under the Stock
Option Plans and 710,000 shares of Common Stock under its Long-Term Plan (as
defined below) as of the date of this Report. Holders of such warrants and
options are likely to exercise them when, in all likelihood, the Company could
obtain additional capital on terms more favorable than those provided by such
warrants and options. In addition, the exercise of such warrants and options
could have a material adverse effect on the market price of, and liquidity in
the market for, shares of Common Stock. Further, while these warrants and
options are outstanding, the Company's ability to obtain additional financing on
favorable terms may be adversely affected.
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Risks of Penny Stock
The Company's securities are subject to Rule 15g-9 under the Exchange Act, which
imposes additional sales practice requirements on broker-dealers that sell such
securities to persons other than established customers and "accredited
investors" (generally, individuals with a net worth in excess of $1,000,000 or
an annual income exceeding $200,000 or $300,000 together with their spouse). For
transactions covered by such rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Consequently, such rule may
adversely affect the ability of broker-dealers to sell the Company's securities
and may adversely affect the ability of the holders of the Company's securities
to sell in the secondary market any of such securities.
SEC regulations define a "penny stock" to be any non-NASDAQ equity security that
has a market price (as therein defined) of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require
delivery, prior to any transaction in a penny stock, of a disclosure schedule
prepared by the SEC relating to the penny stock market. Disclosure is also
required to be made about commissions payable to both the broker-dealer and the
registered representative and current quotations for the securities. Finally,
monthly statements are required to be sent disclosing recent price information
for the penny stock held in the account and information on the limited market in
penny stocks.
Possible Volatility of Market Price of Common Stock
The market price of the Company's securities, like that of many other of
development stage companies and many emerging companies, has been highly
volatile, experiencing wide fluctuations not necessarily related to the
operating performance of such companies. Factors such as the Company's operating
results, announcements by the Company or its competitors concerning
technological innovations and new products or systems may have a significant
impact on the market price of the Company's securities. In addition, the Company
has recently experienced limited trading volume in its Common Stock.
Possible "Year 2000" Problems
Although the Company believes that its computer systems are fully Year 2000
compliant, it is possible that certain computer systems of the Company's
suppliers and contractors may not accept input of, store, manipulate and output
dates prior to the Year 2000 or thereafter without error or interruption. The
Company is requesting assurances from all software vendors from which it has
purchased or from which it may purchase software that such software will
correctly process all date information at all times. Furthermore, the Company is
querying its suppliers and contractors as to their progress in identifying and
addressing problems that their computer systems will face in correct processing
date information as the Year 2000 approaches. However, there can be no assurance
that the Company will identify all date- handling problems of its suppliers and
contractors in advance of their occurrence, or that the Company will be able to
successfully remedy problems that are discovered. The expense of the Company's
efforts to identify and address such problems, or the expenses or liabilities to
which the Company may become subject as a result of such problems, could have a
material adverse effect on the Company.
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Item 2. Description of Properties
The Company owns its 230,000 square foot manufacturing facility in Dunkirk, New
York. Such facility is subject to a first mortgage held by the New York Job
Development Authority securing a promissory note issued to the Chautauqua Region
Industrial Development Corporation, with respect to which approximately $287,648
principal amount was outstanding on June 30, 1999. In addition, such facility is
subject to a second mortgage securing a promissory note issued to the former
owner of the property as part of the purchase price therefor, with respect to
which principal in the amount of approximately $253,638 was outstanding on June
30, 1999.
The Company relocated its headquarters to St. Augustine, Florida, and has
entered into a 20 month lease for approximately 6,100 square feet of executive
office space. The lease will expire in December 1999 and rent for such space is
approximately $3,750 per month. The lease may be extended on a month to month
basis at the option of the leasor. The Company terminated its lease on
approximately 4,700 square feet of office space in Orlando, Florida effective
May 15, 1998.
APT currently leases approximately 21,400 square feet of manufacturing and
warehouse space in St. Augustine, Florida. The leases will expire in February
2000 and rent is approximately $10,400 per month.
In the opinion of the management of the Company, all of the properties described
herein are adequately covered by insurance.
Item 3. Legal Proceedings
In October 1998, the Company received threats of litigation from Stephen Archer,
former Vice-President of Sales and Marketing - Industrial Materials and Gary
Jellum, former Vice President of Administration. Both Mr. Archer and Mr. Jellum
allege that they were constructively terminated by the Company. The Company
believes that the threats of Messrs. Archer and Jellum are without merit and is
prepared to defend itself against any claims made.
On October 22, 1998, MWW/Strategic Communications, Inc., a public relations
firm, filed a demand for arbitration against the Company with the American
Arbitration Association. MWW alleges that the Company owes it professional fees
in the amount of $22,192.86 for services rendered. On May 27, 1999, an
arbitrator awarded $14,947.79 to MWW in full settlement and consideration of all
claims submitted.
In November 1998, Buchanan Ingersoll Professional Corporation filed a complaint
in the Orange County Circuit Court of Florida (the "Circuit Court") against the
Company. Buchanan Ingersoll, which until September 1998 acted as legal counsel
to the Company, alleged that the Company owed it legal fees in the amount of
$192,204.01. On March 11, 1999, the Circuit Court entered a final judgement in
favor of Buchanan Ingersoll in the amount of $197,689.28. On September 24, 1999
the sum of $160,000 was paid to Buchanan Ingersoll in full settlement of the
judgement and the parties executed mutual releases
On or about July 1, 1999 an action was commenced against the Company by The
Hartford in the Circuit Court of Orange County, Florida. The complaint seeks
monetary damages of approximately $56,000 plus prejudgement interest and
attorney's fees. The claims relate to premiums alleged to be owing under certain
insurance policies. The Company has filed a motion to dismiss the action.
The Company is not involved in any other material legal proceedings.
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Item 4. Submission of Matters to a Vote of Security Holders
The Company received written consents of the holders of shares (the "Holders")
representing a majority of the voting power of the outstanding Common Stock and
preferred stock approving an increase in the authorized number of shares of
Common Stock from 50,000,000 to 200,000,000 shares. The Company received from
July 9, 1999 through July 15, 1999 written consents from the Holders
representing a total of 9,126,957 shares which represented 83.6% of the Common
Stock on July 15, 1999. The increase in authorized shares was effectuated by
means of a merger pursuant to which a newly formed wholly owned subsidiary of
the Company, CTI Subsidiary Corp. was merged with and into the Company and the
Company's restated certificate of incorporation was amended to effect the
increase in authorized shares.
Part II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's Common Stock had been quoted on the Nasdaq SmallCap Market (the
"SmallCap Market") under the symbol "CTIX" since May 16, 1996, the effective
date of the Company's registration statement relating to its initial public
offering of Common Stock (the "IPO"). On October 23, 1998, the Common Stock was
delisted by Nasdaq and is currently listed on the Pink Sheets(R), a quotation
medium operated by the National Quotation Bureau, LLC (the "Pink Sheets") under
the symbol "CVTL". The following table sets forth, for each of the quarters
indicated, the high and low bid prices per share of Common Stock as quoted on
the SmallCap Market and the over-the-counter market (source, the Nasdaq- Amex
Market Group). The prices shown represent quotations among securities dealers,
do not include retail markups, markdowns or commissions and may not represent
actual transactions.
Quarter Ended High Low
June 30, 1996 $7.25 $5.00
September 30, 1996 $5.00 $3.375
December 31, 1996 $3.375 $2.25
March 31, 1997 $2.625 $1.375
June 30, 1997 $3.00 $1.00
September 30,1997 $1.75 $1.3125
December 31, 1997 $2.00 $.75
March 31, 1998 $1.1875 $.6875
June 30, 1998 $1.375 $0.625
September 30, 1998 $1.09375 $0.15625
December 31, 1998 $0.3125 $0.001
March 31, 1999 $1.25 $0.01
June 30, 1999 $0.24 $0.001
As of August 11, 1999, the Company had approximately 871 holders of record of
Common Stock.
No dividends have ever been declared or paid on the Company's Common Stock, and
the Company does not anticipate declaring or paying dividends in the foreseeable
future.
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Recent Sales of Unregistered Securities
There were no unregistered securities sold by the Company during the fiscal year
ended June 30, 1999.
On September 24, 1999, the Company sold pursuant to the Private Placement an
aggregate of 4,802,967 shares of Series B Preferred for which the Company
accepted $1,115,000 in cash and the cancellation of $1,767,000 of debt and
accrued interest. The Series B Preferred was sold pursuant to an exemption from
registration provided by Section 4 (2) of the Securities Act of 1933, as amended
(the "Securities Act") and Regulation D promulgated thereunder. In connection
with the sale of the Series B Preferred, the Company did not conduct any general
advertisement or solicitation; each purchaser of the Series B Preferred
represented that, among other things, the purchaser was an "accredited investor"
as that term is defined in Regulation D and the purchaser was purchasing the
shares of Series B Preferred for investment and not with a view to
distributions. Appropriate legends were affixed to the certificates representing
the Series B Preferred. The Company has agreed to file, not later than 120 days
following the final closing of the Private Placement, a registration statement
under the Securities Act registering for resale the Common Stock issuable upon
conversion of the Series B Preferred.
Each share of Series B Preferred has a par value of $.001, a stated value of
$0.60 and is convertible into twenty shares of Common Stock at a conversion
price of $0.03 per share. The holders of the Series B Preferred are entitled to
the number of votes equal to the number of shares of Common Stock of the Company
into which such shares of Series B Preferred are convertible, and are entitled
to vote together with the holders of the Series A Convertible Preferred Stock
and the Common Stock.
The holders of the Series B Preferred are also entitled to certain voting rights
not shared by the holders of the Common Stock, so long as a majority of the
Series B Preferred sold in the Private Placement remains outstanding. The
affirmative vote of the holders of a least two-thirds of the Series B Preferred
will be required for (i) the issuance of securities senior to or on a parity
with the Series B Preferred with respect to dividends, voting or liquidation,
(ii) any alterations to the rights of the Series B Preferred, (iii) a
liquidation, dissolution or sale of substantially all of the assets of the
Company, (iv) the incurrence of over $100,000 of indebtedness (other than
borrowings under working capital lines of credit), and (v) the repurchase of any
of the securities of the Company. In addition, the holders of the Series B
Preferred are entitled to a liquidation preference in an amount per share equal
to $0.81 plus declared and/or accrued but unpaid dividends, if any. Finally, the
holders of the Series B Preferred are entitled to dividends, payable in cash or
in Series B Preferred, at an annual rate of 10% beginning in September 2000. The
Company must pay such dividend prior to any dividend declared on the Common
Stock.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Since inception through June 30, 1999, the Company sustained cumulative losses
of approximately $38,290,000. Such amount includes (i) a one-time, non-cash
charge to operations of approximately $6,232,000 relating to the write-off of
research and development (in-process) technologies that had not reached
technological feasibility and, in the opinion of management, had no alternative
use, which were purchased in conjunction with the Company's acquisition of
Dunkirk in 1994, (ii) approximately $2,528,000 expensed as process development
costs related to research and development of the Company's CRT glass processing
and ALUMAGLASS(R) product lines, (iii) a non-cash charge to operations of
approximately $5,712,000 relating to the write-off of non-productive fixed
assets during the quarter ended June 30, 1997, (iv) an extraordinary item from
the gain on debt retirement of approximately $6,425,000 during the fiscal year
ended June 30, 1998, (v) a non-cash charge to operations of approximately
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$4,913,000 for the write down of property, plant and equipment held for sale
during the quarter ended June 30, 1998, and (vi) other operating losses
including preferred stock dividends of $3,909,000, of approximately $25,330,000.
The Company will continue to incur losses until such time as revenues are
sufficient to fund its continuing operations.
During fiscal 1999 the Company took a number of steps in an effort to preserve
cash, reduce its costs and increase revenues. Raw material costs are expected to
be reduced through the application of lower cost alternative substrates and
coating materials. Investments in product development have been curtailed in
fiscal 1999 and investments in sales and marketing will be increased for the
year ending June 30, 1999. Manufacturing and operating overheads have also been
reduced through payroll reductions and savings associated with non-productive
equipment and processes that have been shut-down, such as the Company's Dunkirk
facility. The Company is selling decorative particles produced by APT and hopes
to increase revenue from this product line. The Company will also strive to
increase sales of other abrasives and aggregates as it implements new marketing
efforts. Implementation of the Company's business plan, however, is subject to
obtaining the necessary financing.
In September 1999, the Company sold in a private placement 4,802,967 shares of
Series B Convertible Preferred Stock ("Series B Preferred") with a par value of
$.001 per share and a stated value $0.60 per share. The Company accepted
$1,115,000 in cash and the cancellation of $1,767,000 of debt including accrued
interest for the sale of the Series B Preferred. From the cash proceeds,
$600,000 was paid to ESDC in full satisfaction of loans having an aggregate
principal balance of $1,221,000. See "Liquidity and Capital Resources". $160,000
was paid in settlement of past due professional services with an accrued
liability of $198,000.
Because the Company has had limited revenue and has incurred significant losses
which has resulted in a working capital deficiency and a stockholders'
deficiency at June 30, 1999, the Report of Independent Auditors includes an
explanatory paragraph indicating there is substantial doubt as to the Company's
ability to continue as a going concern. See Report of Independent Auditors.
Results of Operations
Fiscal Year Ended June 30, 1999 Compared to Fiscal Year Ended June 30, 1998.
Consolidated revenues for fiscal 1999 were approximately $1,119,000 consisting
primarily of decorative particles and performance aggregates sales of
approximately $912,000, ALUMAGLASS(R) sales of approximately $133,000 and CRT
glass recycling fees and related clean cullet sales of approximately $74,000.
For fiscal 1998 consolidated revenues were approximately $1,898,000 of which
approximately $1,275,000 was derived from CRT glass recycling fees and related
clean cullet sales, approximately $321,000 from sales of ALUMAGLASS(R) and
approximately $302,000 from sales of decorative particles and performance
aggregates. This decrease in revenue of $779,000 is as a result of the decreases
of $1,201,000 in CRT glass recycling fees and related clean cullet sales due to
the Company subcontracting those operations to a third party and of $188,000 in
ALUMAGLASS(R) sales as a result of ceasing operations at the Dunkirk plant in
the second quarter of fiscal 1999. These decreases more than offset the $610,000
increase in sales from decorative particles and performance aggregates due to
fiscal 1999 being normal production compared to fiscal 1998 being a start up of
operations.
Cost of goods sold was approximately $1,251,000 for fiscal 1999 versus
approximately $2,703,000 for the prior fiscal year, representing a decrease of
approximately $1,452,000 when sales decreased by only
20
<PAGE>
$779,000. This was a result of a decrease of $1,842,000 from the ceasing of
operations at the Dunkirk plant and that no depreciation was provided for during
fiscal 1999 on the idle Dunkirk property, plant and equipment. An increase of
$390,000 was caused by the increased level of production in the decorative
particles and performance aggregates business due to increased amount of sales
for that business.
As a result of the above decreases in revenue of $779,000 and in cost of goods
sold of $1,452,000, the Company's gross margin improved by $674,000 to a loss of
$131,000 for fiscal 1999 compared to a loss of $805,000 for fiscal 1998. The
shutdown of operations at the Dunkirk plant and the disposal of unprocessed CRT
material resulted in an improved gross margin of $433,000 while the increased
level of sales and production of decorative particles and performance aggregates
had an improved gross margin of $241,000.
Selling, general and administrative expenses decreased by $1,217,000 to
$1,506,000 for fiscal 1999, as compared to $2,723,000 for fiscal 1998. This
decrease was primarily the result of fiscal 1998 having $664,000 recorded for
the penalty cost for the additional 66,360 shares of Series A Preferred Stock
issued as a result of the delay in registering the shares of Common Stock
underlying the Series A Preferred Stock as described in Note 7 to the Financial
Statements, a decrease of $308,000 in corporate salaries, and a decrease of
$105,000 in compensation expenses relating to capital stock.
A charge against operations of approximately $4,913,000 was recorded in the
fourth quarter of fiscal 1998 to write down the property, plant and equipment at
the Dunkirk plant to its estimated disposal value as a result of the Company's
determination at that time to sell that facility. In September 1999, the Company
leased a portion of its Dunkirk plant and is exploring various alternatives for
the use of the remaining portion of the plant to generate additional revenues.
Interest expense decreased by $75,000 to $477,000 for fiscal 1999 from $552,000
for fiscal 1998. The decrease was primarily attributable to the reduction in
debt from the repayment and forgiveness described below which was partially
reduced by the interest accrued and discount amortized on the debt issued in
1999 and 1998.
The Company recorded an extraordinary item for the gain on debt retirement of
$6,425,000 in fiscal 1998. This resulted from a gain of $5,862,000 on the
retirement of Dunkirk's Chautauqua County Industrial Development Agency Bonds, a
gain of $271,000 for the debt forgiveness granted to the Company by the ESDC and
a gain of $292,000 for the accounts payable forgiveness granted to the Company
by certain of its vendors in negotiated settlements.
Liquidity and Capital Resources
The Company's business is capital intensive. The Company has funded its
operations principally from private debt and equity finances and the proceeds of
the IPO. Presently, the Company has limited revenue, has suffered recurring
losses from operations and has a net capital deficiency. The Company has a need
for financing. Management has implemented operational changes and has
restructured certain debt; however, management cannot predict the success of
these operational changes. These conditions, among others, raise substantial
doubt about the Company's ability to continue as a going concern. These issues
also create an uncertainty as to the recoverability of recorded assets and
satisfaction of liabilities. At June 30, 1999, the Company had approximately
$2,514,000 in principal amount of indebtedness (excluding amounts borrowed under
the Credit Agreement, the interim financing and capital lease obligations) and
net working capital deficiency of approximately $5,072,000. As of June 30, 1999,
the Company had cash and marketable securities of approximately $61,000.
As of June 30, 1999, the Company had approximately $2,514,000 in principal
amount of indebtedness
21
<PAGE>
(excluding amounts borrowed under the Line of Credit, the interim financing and
capital lease obligations), consisting of (i) approximately $1,183,000
outstanding principal amount under the term loan with the ESDC, which bears
interest at the prime rate and is payable in monthly installments through
December 2001 (subject to the deferral through July 1, 1998 described above),
(ii) approximately $627,000 aggregate outstanding principal amount under various
mortgage and secured equipment loans and (iii) approximately $704,000 aggregate
outstanding principal amount under subordinated indebtedness from certain of the
Company's CRT glass customers who provided financial assistance to the Company
during its start-up phase. The Company's indebtedness is secured by liens on its
fixed assets. The Company's indebtedness has been used to finance its facility,
equipment and related capital expenditures. Certain of the agreements related to
such indebtedness contain customary covenants and default provisions. At June
30, 1999, the Company was in violation of certain loan covenants and was in
default in payment of principal and interest, related to the above $2,514,000 in
debt, and as a result all of it has been classified as a current liability at
June 30 1999.
In May 1998, the Company entered into the Credit Agreement for the Line of
Credit (which, as amended, provides for up to $1,290,000 principal amount of
loans) pursuant to which the Company had borrowed $610,000 as of June 30, 1998
and the balance as of January 13, 1999. The borrowings are secured by the
receivables and inventory of the Company and accrue interest at an annual rate
of 12%. In connection with the Line of Credit, as amended, the Company issued to
the lenders warrants to purchase an aggregate of 385,075 shares of Common Stock
at an exercise price of $0.67 (after giving effect to the antidilution
adjustment as of December 8, 1998), subject to vesting as the borrowings
occurred. On February 22, 1999, the Funds provided the interim financing to the
Company in the amount of up to $150,000 ($135,000 of which was borrowed at June
30, 1999 and the balance subsequent to year end). Also on July 7, 1999, the
Funds provided additional financing to the Company in the amount of $20,000.
During the period commencing September 1998 and terminating in February 1999,
Eckardt C. Beck, the Acting President and Chief Executive Officer of the
Company, provided loans to the Company or did not receive accrued compensation,
aggregating $190,000. The loans accrue interest at the rate of 12% per year and
became due on September 1, 1999. See "Certain Relationships and Related
Transactions."
In September 1999, the Company raised $1,115,000 in cash and $1,766,778 in the
form of cancellation of debt and accrued interest in the Private Placement of
4,802,967 shares of the Series B Preferred with a par value of $.001 per share
and a stated value of $0.60 per share. Each share of Series B Preferred is
convertible into twenty shares of Common Stock at a conversion price of $0.03
per share. Commencing twelve months from the closing of the Private Placement,
the holders of the Series B Preferred are entitled to receive dividends payable
in cash or in shares of Series B Preferred stock at the option of the Company at
the rate of 10% per annum.
The Company accepted cash and the cancellation of debt as consideration for the
sale of the Series B Preferred. Of the total proceeds $1,115,000 was in cash and
$1,766,778 was in the form of cancellation of debt and accrued interest. Of the
debt converted, $1,652,778 was from the two significant stockholders of the
Company who converted all of the principal and accrued interest owed to them
under the Credit Agreement, the interim financing of February 22, 1999 and the
July 7, 1999 borrowing.. Also the Acting President and Chief Executive Officer
converted $114,000 of the principal and accrued interest owed to him under the
promissory note dated February 23, 1999. The above debt that was cancelled as
consideration for the sale of the Series B Preferred has been classified as
long-term debt at June 30, 1999.
From the cash proceeds of the Private Placement, $600,000 was paid to ESDC in
full satisfaction of the Dunkirk - Term loan with New York State Job Development
Authority with a $1,183,110 principal balance and the Dunkirk - New York Job
Development Authority (Al Tech) subordinated note with a principal balance of
$37,870. In addition, $160,000 was paid to the Company's former legal counsel in
22
<PAGE>
full settlement of an accrued liability of $197,689 for past due professional
services.
The Company's capital lease payments were approximately $27,000 for the year
ended June 30, 1999 and are estimated to be approximately $15,000 for the fiscal
year ending June 30, 2000, under current commitments. The Company has no other
material commitments for capital expenditures.
The Company received waste materials for processing into finished goods
inventory, which then can be sold to its customers. The Company has recorded a
reserve for disposal for the probable disposal costs of waste material it has
received which cannot be processed through the Company's current processing
methods, net of the amount of deferred revenue recorded with respect to such
materials. The Company records a disposal reserve with respect to materials it
cannot process because it is probable it will incur these costs on the ultimate
disposition of the waste materials. The Company estimates that the disposal
costs for material received by the Company that the Company cannot process, if
and when incurred, will exceed the fees the Company was paid to accept such
materials.
The Company had 843 tons of unprocessed waste materials on hand as of June 30,
1999, compared to 2,035 tons on June 30, 1998. The Company's disposal reserve
was $301,000 as of June 30, 1999, compared to $515,000 at June 30, 1998. The
decrease in unprocessed waste materials on hand, and related decrease in reserve
for disposal, resulted primarily from the reduction in the quantities of
unprocessed waste materials on hand, has been credited against operations.
The Company has federal net operating loss carry forwards that amounted to
approximately $24 million at June 30, 1999, which expire between 2006 and 2019.
Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended (the
"Code"), utilization of net operating loss carry forwards is limited if there
has been a change in control (ownership) of the Company. Although a
comprehensive evaluation has not yet been performed, it is likely that due to
historical equity finances, the Company's ability to utilize its net operating
loss carry forwards could be severely limited.
Pending Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"). FAS 133 requires companies to recognize all
derivative contracts as either assets or liabilities in the balance sheet and to
measure them at fair value. FAS 133, as amended by FAS 137, is effective for
periods beginning after June 15, 2000. Historically, the Company has not entered
into derivative contracts. Accordingly, FAS 133 is not expected to affect the
Company's financial statements.
Year 2000 Compatibility
Although the Company believes that its computer systems are fully Year 2000
compliant, it is possible that certain computer systems of the Company's
suppliers and contractors may not accept input of, store, manipulate and output
dates prior to the Year 2000 or thereafter without error or interruption. The
Company is requesting assurances from all software vendors from which it has
purchased or from which it may purchase software that such software will
correctly process all date information at all times. Furthermore, the Company is
querying its suppliers and contractors as to their progress in identifying and
addressing problems that their computer systems will face in correctly
processing date information as the Year 2000 approaches. However, there can be
no assurance that the Company will identify all date handling problems of its
suppliers and contractors in advance of their occurance, or that the Company
will be able to successfully remedy problems that are discovered. The expense of
the Company's efforts to identify and address such problems, or the expenses or
liabilities to which the Company may become subject as a result of such
problems, could have a material adverse effect on the Company.
23
<PAGE>
Item 7. Financial Statements
See Financial Statements annexed.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 9. Directors, Executive Officers; Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.
Eckardt C. Beck, Douglas M. Costle, Stephen D. Fish, Peter H. Gardner, Alexander
P. Haig, and Irwin M. Rosenthal are the members of the Board of Directors of the
Company.
The Officers of the Company are:
Eckardt C. Beck Chairman of the Board, Acting President and Chief
Executive Officer
John G. Murchie Acting Chief Financial Officer and Controller
The name, business address, present principal occupation of employment and
five (5) year employment history of each of the directors and executive officers
of the Company are set forth below. All such individuals are citizens of the
United States unless otherwise indicated.
24
<PAGE>
Position(s) with the Company;
Principal occupation or
Employment; Five (5) Year-
Name, Age and Business Address Employment History
Eckardt C. Beck (56) Mr. Beck has been serving as
acting President and Chief
Conversion Technologies International, Inc. Executive Officer of the
7 San Bartola Drive Company since October, 1998.
St. Augustine, FL 32086 Mr. Beck has been a director of
the Company since February 1995
and Chairman of the Board since
February 1997. Mr. Beck also
served as Acting President and
Chief Executive Officer from
June to August 1997. Mr. Beck
served as the Chairman and
Chief Executive Officer of Air
& Water Technologies
Corporation from October 1987
through June 1994 and as
director from June 1990 through
November 1994. Mr. Beck has
served as Chairman and Chief
Executive Officer of other
environmental technologies
companies prior to 1987. Mr.
Beck also served as the
Assistant Administrator of the
United States Environmental
Protection Agency in charge of
the national water and waste
programs and as the Regional
Administrator of EPA Region 2.
Douglas M. Costle (60) Mr. Costle was appointed to the
Company's Board of Directors in
Rural Route #2, Box 480 October 1997. Mr. Costle has
Woodstock, VT 05091 been a director of Niagara
Mohawk Power Corporation, a
publicly-held utility company,
since January 1991. Mr. Costle
is currently a director of
several privately-held
technology companies and is an
Independent Trustee of John
Hancock Mutual Funds. Retired
since 1992, Mr. Costle served
as Dean of Vermont Law School
from 1987 to 1992 and is a
former Administrator of the
U.S. Environmental Protection
Agency. Currently, Mr. Costle
is inactive on medical leave.
25
<PAGE>
Stephen D. Fish (53) Mr. Fish was appointed to the
Company's Board of Directors in
Fish Enterprises October 1997. Mr. Fish has been
302 West Main Street, Suite 155 President of Fish Enterprises,
Avon, CT 06001 a privately-held real estate
development and management
company, since 1970. Mr. Fish
also serves on the Advisory
Board of Fleet Bank of
Connecticut.
Peter H. Gardner (33) Mr. Gardner has been a director
of the Company since October
Media Technology Ventures 1995. Since January 1998, Mr.
1 First Street, Suite 2 Gardner has been a principal of
Los Altos, CA 94022 Media Technology Ventures, a
privately-held venture capital
firm. From July 1994 through
December 1997, Mr. Gardner was
a Vice President of Technology
Funding Inc., the Managing
General Partner of two
investment funds which are
stockholders of and consultants
to the Company. See "Security
Ownership of Certain Beneficial
Owners, Directors and
Management" and "Certain
Relationships and Related
Transactions." Mr. Gardner held
the position of Project Leader
and Project Scientist at Roy F.
Weston, Inc., an environmental
engineering firm, from June
1990 through August 1993. Mr.
Gardner was pursuing a graduate
degree in business
administration between
September 1993 and June 1995.
Alexander P. Haig (47) Mr. Haig has been a director of
the Company since May 1996.
Sky Station International Since February 1996, Mr. Haig
1824 "R" Street, N.W. has been President and Chief
Washington, D.C. 20009 Operating Officer of Sky
Station International Inc., a
privately-held
telecommunications company. Mr.
Haig has served since 1988 as a
principal and legal counsel to
Worldwide Associates, Inc., a
privately-held business adviser
to both United States and
foreign countries for marketing
and sales activities. Prior to
1988, Mr. Haig was an attorney
in private practice.
26
<PAGE>
Irwin M. Rosenthal (70) Mr. Rosenthal has been a
director of the Company since
Graham & James LLP May 1996. Mr. Rosenthal is an
885 Third Avenue, 21st Floor attorney and since 1960 has
New York, N.Y. 10022 specialized in securities law.
He is currently a partner at
Graham & James LLP. Prior to
July 1998, Mr. Rosenthal was a
partner at Rubin Baum Levin
Constant & Friedman. Mr.
Rosenthal is also a director of
Magna-Lab, a publicly- traded
chemical and medical technology
company. He is also a director
of Life Medical Sciences, Inc.,
a publicly-traded medical
technology company, and
Echocath, Inc., a
publicly-traded medical
technology company.
John G. Murchie (62) Mr. Murchie has been the Acting
Chief Financial Officer of the
Conversion Technology International, Inc. Company since January 1998, and
7 San Bartola Drive Controller since September
St. Augustine, FL 32086 1997. From February 1995 to
September 1997, Mr. Murchie was
the Controller and Chief
Administrative Officer of
Dunkirk. From February 1994 to
February 1995, Mr. Murchie
worked on a full time basis for
Dunkirk as a consultant and was
not otherwise employed. From
November 1985 to February 1994,
Mr. Murchie was employed by
Rich Products Corporation, a
privately-held food products
company, in various financial
positions. Mr. Murchie received
a B.S. in Business
Administration from Miami
University of Ohio.
All directors of the Company are elected by the stockholders, or in the case of
a vacancy, by the directors then in office, to hold office until the next annual
meeting of stockholders of the Company and until their successors are elected
and qualified or until their earlier resignation or removal.
Board Committees
The Board of Directors has established four committees - the Audit Committee,
the Compensation Committee, the Fairness Committee and the Nominating Committee.
The Audit Committee oversees the activities of the Company's independent
auditors and reviews the Company's internal accounting procedures and controls.
The Compensation Committee makes recommendations to the Board with respect to
general compensation and benefit levels for employees, determines the
compensation and benefits for the Company's executive officers and administers
the Company's stock option and incentive plans. The Nominating Committee makes
recommendations to the Board with respect to candidates to
27
<PAGE>
fill vacancies on the Board, recommends an appropriate slate of candidates for
election each year, and reviews senior officer candidates. Stockholders wishing
to nominate director candidates for consideration may do so by writing to the
Nominating Committee at the Company at 7 San Bartola Drive, St. Augustine,
Florida, 32086. The Fairness Committee makes recommendations to the Board with
respect to transactions involving relating parties, oversees trading and SEC
compliance procedures and addresses corporate governance issues. The current
members of these Committees are:
Audit Committee: Irwin M. Rosenthal and Douglas M. Costle
Compensation Committee: Peter H. Gardner and Douglas M. Costle
Fairness Committee: Alexander P. Haig and Stephen D. Fish
Nominating Committee: Peter H. Gardner and Douglas M. Costle
Limitation of Liability and Indemnification Matters
The Company's Certificate of Incorporation contains provisions to indemnify its
directors and officers to the fullest extent permitted by Delaware law, and also
includes provisions to eliminate the personal liability of the directors and
officers of the Company and its stockholders to the fullest extent permitted by
Delaware law. Under current law, such exculpation would extend to an officer's
or director's breaches of fiduciary duty, except for (i) breaches of such
person's duty of loyalty, (ii) those instances where such person is found not to
have acted in good faith and (iii) those instances where such person received an
improper personal benefit as a result of such breach.
The Company's bylaws provide that the Company may indemnify any person,
including officers and directors, with regard to any action or proceeding to the
fullest extent permitted under Delaware law.
Section 16(a) Beneficial Ownership Reporting Compliance
The Company knows of no late filings pursuant to Section 16(a) of the Exchange
Act during fiscal 1999..
Item 10. Executive Compensation.
Summary Compensation Table
The following summary compensation table sets forth the aggregate compensation
paid or accrued by the Company for the fiscal years ended June 30, 1999, 1998
and 1997 to Eckardt C. Beck, the Company's Acting President and Chief Executive
Officer and who served as the Company's chief executive officer during a portion
of fiscal 1999 and 1998, and William L. Amt, who also served as the Company's
chief executive officer during a portion of fiscal 1999 and 1998 (collectively,
the "Named Executive Officers"). No other executive officer received annual
compensation in excess of $100,000 for fiscal 1999.
28
<PAGE>
<TABLE>
<CAPTION>
Long Term
Compensation
Awards Payouts
Securities
Other Underlying All
Name and Principal Fiscal Salary Bonus Annual Options/ LTIP Other
Position Year ($) ($) Compensation SARs Payouts Compensation
------------------ ------ ------ ----- ------------ ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Eckardt C. Beck 1999 -- -- 120,000(1) -- --
Acting President & 1998 -- -- 85,677(1) 300,000(2) --
Chief Executive Officer 1997 52,000(1) -- 10,121(3) --
from October 1998 to
date and from June
1997 to August 1997
William L. Amt 1999 44,615(4) -- -- -- --
Former President and 1998 146,667(4) -- -- 300,000(2) --
Chief Executive Officer 1997 -- -- -- -- --
from August 1997 to
October 1998
</TABLE>
- ------------------------
(1) Mr. Beck has served as Chairman since February 1997, and as Acting
President and Chief Executive Officer from June 1997 to August 1997 and
from October 1998 through the present. Compensation represents consulting
fees pursuant to his Consulting Agreement with the Company. See "Certain
Relationships and Related Transactions." Mr. Beck currently has accrued
for his benefit $10,000 per month under the Consulting Agreement.
(2) Represents options granted in July and August 1997 pursuant to the
Company's 1996 Long-Term Plan which vest 20% at date of grant and 20% for
each of the next four years, expire on the seventh anniversary of the
dates of grant and have an exercise price of $0.78 per share.
(3) Represents options granted in July and October 1996 pursuant to the
Company's Non-Employee Plan. All options vest one year from date of grant
and have an exercise price of $0.78 per share.
(4) Mr. Amt ceased being an officer of the Company in October 1998.
Option Plans
The Company maintains an Employee Stock Option Plan (the "Employee Plan"), a
Non-Employee Director Stock Option Plan (the "Non-Employee Plan") and a Long
Term Employee Incentive Plan (the "Long-Term Plan"). Under the Employee Plan and
the Non-Employee Plan stock options may be granted at the discretion of the
Board of Directors. Under the Long-Term Plan, stock options, stock awards or
cash awards may be granted at the discretion of the Board of Directors.
The Company has reserved 440,000, 250,000 and 710,000 shares, respectively, of
its Common Stock for issuance upon the exercise of options and awards granted
under the Employee, Non-Employee and Long-Term Plans, respectively. At June 30,
1999, the Company has reserved 1,414,392 shares of Common Stock for the exercise
of all options.
Under the Non-Employee Plan, options to purchase an aggregate of 167,918 shares
are outstanding as of October 1, 1999. These options vest in full one year after
the date of grant and expire ten years from the date of grant.
Under the Employee Plan, options to purchase an aggregate of 257,639 shares are
outstanding as of October 1, 1999. These options vest one-third on each of the
first three anniversaries of the date of grant and expire on the seventh
anniversary of the date of grant.
Under the Long-Term Plan, options to purchase an aggregate of 305,000 shares are
outstanding and an additional 90,000 shares have been granted, exercised, and
are outstanding. The options granted under the
29
<PAGE>
Long-Term Plan vest 20% at date of grant and 20% for each of the next four years
and expire on the seventh anniversary of the date of grant.
The Company grants stock options for the Employee Plan and Non-Employee Plan at
exercise prices equal to or greater than the fair market value of the Common
Stock on the date of grant.
At the closing of the Private Placement, the Company granted options outside of
the Employee Plan, the Non-Employee Plan and the Long-Term Plan to members of
the Board of Directors and Officers of the Company. See "Certain Relationships
and Related Transactions".
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values
The following table sets forth information (on an aggregate basis) concerning
exercises of stock options during fiscal 1999 by each of the Named Executive
Officers and the final year-end value of unexercised options.
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
unexercised "In-the-Money"
Options/SARs at Options/SARs at
Fiscal Year-End Fiscal Year-End (1)
Shares
Acquired Value Unexercis- Unexercis-
Name on Exercise Realized Exercisable Able Exercisable Able
---- ----------- -------- ----------- ---- ----------- ----
<S> <C> <C> <C> <C> <C> <C>
Eckardt C. Beck -- -- 191,338 120,000 $ -- $ --
William L. Amt -- -- -- -- $ -- $ --
</TABLE>
(1) Calculated based on the difference between the exercise price and the
closing price of a share of the Common Stock on the over-the-counter
market on June 30, 1999.
401(k) Plan
The Company established a 401(k) defined contribution plan covering
substantially all employees meeting certain minimum age and service requirements
effective August 1, 1998. The Company's contribution to the plan is determined
by the Board of Directors and is limited to a maximum of 100% of the employee's
contribution and 6% of the Employee's compensation. Contributions made to the
plan for the fiscal year ended June 30, 1999 were $18,913.
Compensation of Directors
In fiscal 1999, directors who were full-time employees of the Company received
no cash compensation for services rendered as members of the Board or committees
thereof. Directors who were not full-time employees of the Company received
reimbursement of out-of-pocket expenses for attendance at Board meetings. Non-
Employee directors received no other compensation for their services as
directors.
30
<PAGE>
Employment and Consulting Arrangements
The Company entered into a Consulting Agreement with Eckardt C. Beck in March
1995, which was amended in February 1997, August 1997 and July 1998 (as amended,
the "Consulting Agreement") (formal documentation of the July 1998 amendment has
not been fully executed). Pursuant to the Consulting Agreement, Mr. Beck has
agreed to, among other things, assist the Company in strategic planning,
business development, investor relations, fund raising and such other activities
as shall be reasonably requested by the Board and within Mr. Beck's areas of
expertise. Mr. Beck will accrue and/or receive a monthly salary of $10,000
pursuant to the Consulting Agreement until its expiration in August 2000. Mr.
Beck has also received stock options in connection with the Private Placement.
See "Certain Relationships and Related Transactions".
In August 1997, the Company entered into a one-year employment agreement with
William L. Amt which provided for automatic one-year renewal options unless
contrary written notice is given by either party. In October 1998, Mr. Amt
resigned from his position as President and Chief Executive Officer under this
agreement. Under the terms of the employment agreement, which included
confidentiality and non-competition provisions, Mr. Amt received an annual
salary of $160,000, subject to increase at the discretion of the Board. Both the
Company and Mr. Amt had the right to terminate the employment agreement at any
time by providing written notice to the other party. Mr. Amt was granted
non-qualified stock options to purchase 300,000 shares of Common Stock, the
exercise price of which was repriced from $1.375 to $0.78 per share in January
1998. Twenty percent (20%) of such options were vested immediately and twenty
percent (20%) of such options will vest on the first, second, third and fourth
anniversary of the date of issuance. See "Certain Relationships and Related
Transactions."
In January 1998, Jack D. Hays, Jr. and Richard H. Hughes ceased to be executive
officers of the Company. In connection with the termination of their employment
with the Company, each of Mr. Hays and Mr. Hughes entered into a Termination
Agreement with the Company. The Termination Agreements (i) terminate the
Employment Agreements between the Company and Mr. Hays and Mr. Hughes (except
with respect to continued indemnification as former officers of the Company and
confidentiality obligations of Mr. Hays and Mr. Hughes), (ii) provide that Mr.
Hays and Mr. Hughes forfeit all stock options held by them whether or not
vested, (iii) provide that each of them will receive a cash payment of $18,000
in full satisfaction of accrued salary and any other amounts otherwise due under
their Employment Agreements, (iv) contain a release by Mr. Hays and Mr. Hughes
with respect to any and all claims against the Company and (v) require Mr. Hays
and Mr. Hughes to refrain from soliciting any employees of the Company. The
Company has also entered into a Manufacturer's Representative Agreement with an
entity formed and owned by such former officers pursuant to which they will
continue to perform marketing services for the Company. Pursuant to such
Manufacturer's Representative Agreement, such entity was to receive compensation
on a commission basis with respect to its sales of the Company's products. The
Company terminated the Manufacturer's Representative Agreement effective August
1, 1998. See "Certain Relationships and Related Transactions."
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of October 1, 1999, certain information as to
the stock ownership and voting power of all persons (or groups of persons) known
by the Company to be the beneficial owner of more than five percent (5%) of the
Common Stock, each director of the Company, each of the executive officers
included in the Summary Compensation Table and all directors and executive
officers as a group.
31
<PAGE>
Number of Shares Percentage of Voting
Name of Beneficial Owner(1) Beneficially Owned (2) Power (3)
--------------------------- ---------------------- ---------
Eckardt C. Beck (4) 10,278,021 8.6
Peter H. Gardner (5) 159,754 *
Alexander P. Haig (6) 128,537 *
Douglas M. Costle (7) 128,416 *
Stephen D. Fish (8) 3,487,425 3.0
Irwin M. Rosenthal (9) 128,537 *
John G. Murchie (10) 490,725 *
All officers and directors as a 14,801,415 11.9
group (7 persons) (11)
Lancaster Investment Partners (12) 10,000,000 8.8
500 N. Gulph Road
Suite 110
King of Prussia, PA 19406
The Aries Master Fund, 40,651,591 35.5
a Cayman Islands Trust (13)
787 7th Avenue- 48th Floor
New York, New York 10019
Aries Domestic Fund, L.P. (14) 17,885,617 15.6
787 7th Avenue, 48th Floor
New York, New York 10019
Porter Partners, L.P. (15) 17,786,680 15.6
100 Shoreline, Suite 211B
Mill Valley, California 94941
P.A.W. Offshore Fund, Ltd. (16) 6,120,000 5.4
90 Mees Pierson
904 East Bay Street
P.O. Box 55-6233
Nassau, Bahamas
- --------------------
* Less than one percent.
(1) Unless otherwise indicated and subject to applicable community property
laws, each stockholder has sole voting and investment power with respect
to all shares of Common Stock beneficially owned by such stockholder.
Unless otherwise indicated, the address of each stockholder is c/o
Conversion Technologies International, Inc., 7 San Bartola Drive, St.
Augustine, Florida 32086.
(2) The number of shares beneficially owned by each person named in the table
includes shares held by each individual of (i) the Company's Common Stock;
(ii) the Company's Series A Preferred Stock, as converted into Common
Stock; (iii) Series A Preferred Stock subject to warrants that are
presently exercisable, as converted into Common Stock; (iv) the Company's
Series B Convertible Preferred Stock, as converted into Common Stock; and
(v) Common Stock subject to options or warrants that are presently
exercisable or exercisable within 60 days of October 1, 1999.
(3) Applicable percentage of voting power is based on the 113,922,985 shares
of Common Stock outstanding as of October 1, 1999. That number is
comprised of 7,565,045 outstanding shares of Common Stock, 10,298,600
shares of
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<PAGE>
Common Stock issuable upon conversion of 514,930 outstanding shares of
Series A Preferred Stock and 96,059,340 shares of Common Stock issuable
upon conversion of 4,802,967 outstanding shares of Series B Convertible
Preferred Stock. Shares of Series A Preferred Stock and Common Stock
subject to options and warrants that are presently exercisable or
exercisable within 60 days are deemed to be beneficially owned by the
person holding such options and warrants for the purpose of computing the
percentage of ownership of such person but are not treated as outstanding
for the purpose of computing the percentage of any other person.
(4) Includes 13,833 shares of Common Stock held, 224,000 shares of Common
Stock issuable upon conversion of 11,200 outstanding shares of Series A
Preferred Stock and 3,800,000 shares of Common Stock issuable upon
conversion of 190,000 outstanding shares of Series B Convertible Preferred
Stock. Also includes currently exercisable options to purchase 6,240,188
shares of Common Stock. Excludes options to purchase 12,217,700 shares of
Common Stock which are not exercisable within 60 days. The address of such
stockholder is 6345 NW 26th Terrace, Boca Raton, Florida 33496.
(5) Includes currently exercisable options to purchase 159,754 shares of
Common Stock. Excludes options to purchase 236,832 shares of Common Stock
which are not exercisable within 60 days. Mr. Gardner was formerly an
Investment Officer at Technology Funding, Inc. ("TFI"), the Managing
General Partner of Technology Funding Partners III, L.P. ("TFP III") and
Technology Funding Partners V, an Aggressive Growth Fund, L.P. ("TFVP V").
Mr. Gardner disclaims beneficial ownership of all securities of the
Company owned by TFP III and TFVP V.
(6) Includes currently exercisable options to purchase 128,537 shares of
Common Stock. Excludes options to purchase 236,832 shares of Common Stock
which are not exercisable within 60 days.
(7) Includes currently exercisable options to purchase 128,416 shares of
Common Stock. Excludes options to purchase 236,832 shares of Common Stock
which are not exercisable within 60 days.
(8) Includes 448,000 shares issuable upon conversion of 22,400 shares of
Series A Preferred Stock and currently exercisable options to purchase
3,039,425 shares of Common Stock. Excludes options to purchase 6,058,850
shares of Common Stock which are not exercisable within 60 days.
(9) Includes currently exercisable options to purchase 128,537 shares of
Common Stock. Excludes options to purchase 236,832 shares of Common Stock
which are not exercisable within 60 days.
(10) Includes currently exercisable options to purchase 490,725 shares of
Common Stock. Excludes options to purchase 973,966 shares of Common Stock
which are not exercisable within 60 days.
(11) Calculation excludes options to purchase 20,197,874 shares of Common Stock
which are not exercisable within 60 days.
(12) Includes 10,000,000 shares of Common Stock issuable upon conversion of
500,000 shares of Series B Convertible Preferred Stock.
(13) Paramount Capital Asset Management, Inc. ("PCAM") is the Investment
Manager to The Aries Master Fund, a Cayman Islands Trust (the "Aries
Trust"). Lindsay A. Rosenwald, M.D. is President and sole shareholder of
PCAM. PCAM and Dr. Rosenwald may be considered to beneficially own the
securities owned by the Aries Trust by virtue of their authority to vote
and/or dispose of the securities. Securities held by the Aries Trust
consist of 1,478,400 shares of Common Stock issuable upon conversion of
73,920 shares of Series A Preferred Stock, 38,475,700 shares of Common
Stock issuable upon conversion of 1,923,785 outstanding shares of Series B
Convertible Preferred Stock, 148,728 shares of Common Stock issuable upon
exercise of Class A Warrants (includes the Class B Warrants underlying
such Class A Warrants); 400,903 shares of Common Stock underlying
additional warrants, and 147,860 shares of Common Stock underlying Series
A Preferred Stock subject to warrants. In addition, Dr. Rosenwald
beneficially owns 205,134 shares of the Company's Common Stock and
warrants to purchase 44,727 shares of the Company's Common Stock.
(14) PCAM is the General Partner of the Aries Domestic Fund L.P. Dr. Rosenwald
is the President and sole shareholder of PCAM. PCAM and Dr. Rosenwald may
be considered to beneficially own the securities owned by the Aries
Domestic Fund, L.P. by virtue of their authority to vote and/or dispose of
the securities. PCAM and Dr. Rosenwald beneficially
(footnotes continued on next page)
33
<PAGE>
own all securities of the Company held by the Aries Domestic Fund, L.P.
Securities held by Aries Domestic Fund, L.P. consist of 761,600 shares of
Common Stock issuable upon conversion of 38,080 shares of Series A
Preferred Stock, 16,616,920 shares of Common Stock issuable upon
conversion of 830,846 outstanding shares of Series B Convertible Preferred
Stock, 247,882 shares of Common Stock issuable upon exercise of Class A
Warrants (including the Class B Warrants underlying such Class A
Warrants); warrants to purchase an additional 183,035 shares of Common
Stock, and warrants to purchase Series A Preferred Stock which is
convertible into 76,180 shares of Common Stock. In addition, Dr. Rosenwald
beneficially owns 205,134 shares of the Company's Common Stock and
warrants to purchase 44,727 shares of the Company's Common Stock.
(15) Includes (A) securities held by Porter Partners, L.P. consisting of
896,000 shares of Common Stock issuable upon conversion of 44,800 shares
of Series A Preferred Stock and 13,333,340 shares of Common Stock issuable
upon conversion of 666,667 outstanding shares of Series B Convertible
Preferred Stock, and (B) securities held by EDJ Limited consisting of
224,000 shares of Common Stock issuable upon conversion of 11,200 shares
of Series A Preferred Stock and 3,333,340 shares of Common Stock issuable
upon conversion of 166,667 outstanding shares of Series B Convertible
Preferred Stock. Jeffrey H. Porter is the Managing General Partner of
Porter Partners, L.P. and EDJ Limited. Mr. Porter may be considered a
beneficial owner of the securities owned by Porter Partners, L.P. and EDJ
Limited by virtue of his authority to vote and/or dispose of the
securities held by Porter Partners, L.P. and EDJ Limited. Mr. Porter
disclaims beneficial ownership of all securities of the Company held by
Porter Partners, L.P. and EDJ Limited.
(16) Includes 1,120,000 shares of Common Stock underlying 56,000 shares of
Series A Preferred Stock and 5,000,000 shares of Common Stock issuable
upon conversion of 250,000 outstanding shares of Series B Convertible
Preferred Stock. Peter Wright is the Investment Manager for the P.A.W.
Offshore Fund, Ltd. Mr. Wright may be considered the beneficial owner of
the securities owned by the P.A.W. Offshore Fund, Ltd. by virtue of his
authority to vote and/or dispose of the Company's securities held by
P.A.W. Offshore Fund, Ltd. Mr. Wright disclaims beneficial ownership of
all securities of the Company held by P.A.W. Offshore Fund, Ltd
Item 12. Certain Relationships and Related Transactions.
During the period from September 1998 to February 1999, Eckardt C. Beck, the
Chairman of the Board and Acting President and Chief Executive Officer of the
Company, provided loans to the Company or did not receive accrued compensation
aggregating $190,000, which loans were represented by that certain Promissory
Note dated February 23, 1999. The loans accrue interest at the rate of 12% per
year and are due upon demand but in no event later than September 1, 1999. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." Mr. Beck converted $114,000 of
principal and accrued interest into Series B Preferred Stock on September 24,
1999.
For a description of the terms of the Consulting Agreement between the Company
and Mr. Beck, see "Executive Compensation - Employment and Consulting
Arrangements".
On May 8, 1998, the Company entered into the Credit Agreement with the Funds,
two significant stockholders of the Company. The Credit Agreement provided for a
line of credit (the "Line of Credit") of up to $1,200,000 pursuant to which the
Company could draw down up to $300,000 per month, although draw downs beyond the
initial $300,000 were at the discretion of the Funds. The Line of Credit was
secured by the receivables and inventory of the Company and its subsidiaries.
Amounts borrowed under the Line of Credit accrued interest at an annual rate of
12%. The Line of Credit matured on the earlier of May 8, 1999 or upon the
completion of any financing of at least $1,500,000. The Credit Agreement
contained customary covenants and default provisions. In addition, upon an Event
of Default (as defined in the Credit Agreement), but only after a 60-day cure
period, the Funds were entitled to appoint a majority of the Company's Board of
Directors. In addition, upon an Event of Default, but only after a 90-day cure
period, the Funds could convert any outstanding principal amount plus interest,
into shares of Common Stock of the Company at the then fair market value of the
Common Stock. As of December 15, 1998, the Line of Credit was amended to
increase the amount up to $1,290,000. As of January 13, 1999, the Company had
drawn down all amounts under the Line of Credit.
In connection with the Line of Credit, as amended, the Company issued to the
Funds warrants to purchase an
34
<PAGE>
aggregate of 385,075 shares of Common Stock at an exercise price equal to $0.67
per share (after giving effect to antidilution adjustments resulting from a
reset of the conversion price of the Company's Series A Preferred Stock on
December 8, 1998). Of such warrants, warrants to purchase 29,850 shares of
Common Stock vested upon each $100,000 (or ratable portion thereof) that was
drawn under the Credit Agreement.
On February 22, 1999, the Company having drawn down an aggregate of $1,290,000
on the Line of Credit, in default on its interest payments due thereunder and in
need of financing, entered into a series of agreements with the Funds which
amended the Line of Credit Agreement and the notes evidencing the amounts drawn
down on the Line of Credit. Under such amendments, if the Company failed to
raise an aggregate of $1,500,000 by April 1, 1999, the Funds could accelerate
the amounts due under the Line of Credit Agreement and exercise its repayment
right by requiring the Company to repay such amount by delivering either (i) the
amount of shares of Common Stock equal to the principal and interest due under
the Line of Credit or (ii) 90% of the shares of the common stock of APT.
Contingent upon the Company raising an aggregate of $1,500,000 by April 1, 1999,
the Funds delayed their right to payment of principal and interest under the
Line of Credit until September 1, 1999 or the completion of finances by the
Company raising an aggregate of $2,790,000. In addition, on February 22, 1999,
in exchange for a working capital loan of up to the amount of $150,000, the
Company delivered an unsecured convertible promissory note (the "Convertible
Note") in the amount of $150,000 in favor of the Funds due on September 1, 1999
and bearing interest at the rate of 12% per annum. Under the Convertible Note,
upon either an event of default or the inability of the Company to raise
$1,500,000 by April 1, 1999, the Funds could (i) convert the debt into the
amount of shares of Common Stock equal to the principal and interest due under
the Convertible Note or (ii) exchange the debt for 10% of the shares of common
stock of APT. The Funds also agreed that the right to payment for the
Convertible Note and the amounts drawn down on the Line of Credit would be
subordinated to the right of payment under loans aggregating $190,000 made to
the Company by Mr. Beck during 1998 and 1999.Also on July 7, 1999, the Funds
provided additional financing to the Company in the amount of $20,000.
On September 24, 1999, the Company sold in a Private Placement 4,802,967 shares
of the Series B Preferred with a par value of $.001 per share and a stated value
of $0.60 per share. The Company accepted $1,115,000 in cash and $1,767,000 in
cancellation of debt and accrued interest as consideration for the sale of the
Series B Preferred. Included in the cancellation of debt was $1,653,000 from the
Funds who converted all of the debt and accrued interest owed under the Credit
Agreement and the Aries Interim Financing and thereby canceling all of the
remaining debt obligations to the Funds including the rights to convert debt
plus interest into shares of Common Stock of the Company and/or shares of APT.
Also the Funds have agreed to allow the Company to repurchase their shares of
Series B Preferred at a rate per share of the underlying Common Stock of $0.03
per share during the first year from the date of closing of the Private
Placement, $0.04 per share during the second year from such date and $0.05 per
share during the third year from such date.
As part of the Private Placement, Mr. Beck purchased 190,000 shares of the
Series B Preferred for cancellation of debt and accrued interest of $114,000,
Lancaster Investment Partners purchased 500,000 shares of Series B Preferred for
$300,000 cash, The Aries Master Fund purchased 1,923,785 shares of Series B
Preferred for cancellation of debt and accrued interest of $1,154,271, Aries
Domestic Fund, L.P. purchased 830,846 shares of Series B Preferred for
cancellation of debt and accrued interest of $498,508, Porter Partners, L.P. and
EDJ Limited purchased 833,334 shares of Series B Preferred for $500,000 cash,
and P.A.W. Offshore Fund, Ltd. purchased 250,000 shares of Series B Preferred
for $150,000 cash in the Private Placement.
From the cash proceeds of the Private Placement, the Company paid $600,000 to
ESDC in full satisfaction of the equipment term note assumed from Key Bank with
an adjusted principal balance of $1,183,110 and also another Dunkirk
subordinated note due ESDC with a principal balance of $37,870. In consideration
for this payment made by the Company, ESDC agreed to assign the loans and
related security interests (the "Security Interests") to the Company. The
Company has agreed to give a security interest in the Security Interests to
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<PAGE>
Messrs. Beck and Fish and Graham & James LLP (the "G & J Security Interest") to
secure indebtedness owing to them.
Also on September 24, 1999, upon the consummation of the Private Placement, the
Company granted 36,293,101 non-qualified stock options (such options being after
issuance equal to 20% of the outstanding shares of Common Stock of the Company
on a fully diluted basis) at an exercise price of $0.03 per share (the
conversion price of the Common Stock in the Private Placement). Such options
vest one-third upon grant, one-third on the first anniversary of the date of
grant and one-third on the second anniversary of the date of grant and to expire
on the tenth anniversary of the date of grant. Of these options granted, Mr.
Beck was granted 18,146,550, Mr. Fish was granted 9,073,275, Messrs Costle,
Gardner, Haig and Rosenthal were each granted 340,248 and Mr. Murchie was
granted 1,360,991.
In July and August of 1997, the Company borrowed from the Funds an aggregate of
$500,000 (the "1997 Bridge Loan") which was used by the Company for general
working capital purposes. On September 8, 1997, the Company repaid the 1997
Bridge Loan together with accrued interest at the rate of 12% per annum, and in
connection therewith, the Company issued to the Funds warrants to purchase
198,863 shares of Common Stock at an exercise price equal to $0.66 (after giving
effect to antidilution adjustments resulting from the sale of Series A Preferred
Stock, the issuance of the additional shares of Series A Preferred Stock in
April 1998, and the reset of the conversion price of the Series A Preferred
Stock on December 8, 1998).
In August 1997, the Company entered into a one-year employment agreement with
William L. Amt which provided for automatic one-year renewal options unless
contrary written notice is given by either party. In October 1998, Mr. Amt
resigned from his position as President and Chief Executive Officer under this
agreement. Under the terms of the employment agreement, which included
confidentiality and non-competition provisions, Mr. Amt received an annual
salary of $160,000, subject to increase at the discretion of the Board. Both the
Company and Mr. Amt had the right to terminate the employment agreement at any
time by providing written notice to the other party. Mr. Amt was granted
non-qualified stock options to purchase 300,000 shares of Common Stock, the
exercise price of which was repriced from $1.375 to $0.78 per share in January
1998. Mr. Amt's options expired in connection with his resignation from the
Company. See "Executive Compensation-Employment and Consulting Arrangements."
In January 1998, Jack D. Hays, Jr. and Richard H. Hughes, formerly executive
officers of the Company, ceased to be employed with the Company. In connection
with the termination of their employment with the Company, each of Mr. Hays and
Mr. Hughes entered into a Termination Agreement with the Company. The
Termination Agreements (i) terminate the Employment Agreements between the
Company and Mr. Hays and Mr. Hughes (except with respect to continued
indemnification as former officers of the Company and confidentiality
obligations of Mr. Hays and Mr. Hughes), (ii) provide that Mr. Hays and Mr.
Hughes forfeit all stock options held by them whether or not vested, (iii)
provide that each of them will receive a cash payment of $18,000 in full
satisfaction of accrued salary and any other amounts otherwise due under their
Employment Agreements, (iv) contain a release by Mr. Hays and Mr. Hughes with
respect to any claims against the Company and (v) require Mr. Hays and Mr.
Hughes to refrain from soliciting any employees of the Company. The Company also
entered into a marketing and sales representative agreement (the "Manufacturer's
Representative Agreement") with Engineered Product Sales Associates, a company
formed and owned by Messrs. Hays and Hughes. Pursuant to such Manufacturer's
Representative Agreement, such entity was to receive commission payments based
on sales at various levels. The Company terminated the Manufacturers'
Representation Agreement effective August 1, 1998. See "Executive Compensation
- -Employment and Consulting Arrangements."
On December 8, 1997, the Company consummated the final closing of a private
placement of the Company's Series A Preferred Stock. The Company sold an
aggregate of 553,000 shares of Series A Preferred Stock in the private
placement. Each share of Series A Preferred Stock is currently convertible into
twenty shares of
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<PAGE>
Common Stock (after giving effect to an anti-dilution adjustment resulting from
the reset of the conversion price of the Series A Preferred Stock on December 8,
1998). PCAM acted as placement agent for the private placement and received an
aggregate placement fee of $497,700, and an aggregate expense allowance of
$232,700. In addition, the Company granted to PCAM, and/or its designees,
warrants to purchase 61,945 shares of Series A Preferred Stock at an exercise
price equal to $9.82 per share (after giving effect to an anti-dilution
adjustment resulting from the reset of the conversion price of the Series A
Preferred Stock on December 8, 1998). See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
The proceeds of the offering were used to (i) redeem $8 million principal amount
IDA Bonds for approximately $1.6 million; (ii) repay the $500,000 principal
amount 1997 Bridge Loan, including interest; (iii) pay transaction costs
incurred in connection with the offering; and (iv) provide working capital for
the Company's operations.
On July 1, 1997, Messrs. Hays and Hughes, former executive officers of the
Company, were granted incentive stock options to purchase 100,000 and 75,000
shares of Common Stock, respectively, at an exercise price of $1.625 per share.
Such options were canceled in connection with the termination of their
employment with the Company in January 1998.
On July 22, 1997, Messrs. Beck and Pappas were granted non-qualified stock
options to purchase 300,000 and 20,000 shares, respectively, of Common Stock at
an exercise price of $1.375. Mr. Beck's options vest twenty percent (20%) at
issuance and twenty percent (20%) on the first, second, third and fourth
anniversary of the date of issuance. Mr. Pappas' options were vested upon
issuance.
On August 6, 1997, Messrs. Gardner and Katzmann were each granted stock options
to purchase 20,000 shares of Common Stock at an exercise price of $1.875 under
the Stock Option Plan for Non-Employee Directors. Twenty percent (20%) of such
options vested upon issuance and twenty percent (20%) vest on the first, second,
third and fourth anniversary of the date of issuance. Mr. Katzmann ceased to be
a director of the Company in December 1997 and all options granted to Mr.
Katzmann under the Stock Option Plan for Non-Employee Directors have expired.
On August 29, 1997, Mr. Fish purchased 20,000 shares of Series A Preferred Stock
for $200,000, and on September 5, 1997, Mr. Beck purchased 10,000 shares of
Series A Preferred Stock for $100,000 in the Series A Preferred Stock Private
Placement.
On January 27, 1998, Messrs. Costle, Fish and Gardner were each granted stock
options to purchase 25,000 shares of Common Stock at an exercise price of $0.78
(the closing price of the Common Stock on the Nasdaq SmallCap Market on such
date) under the Stock Option Plan for Non-Employee Directors. Forty percent
(40%) of such options vested upon issuance and twenty percent (20%) vest on the
first, second and third anniversary of the date of issuance. Also on January 27,
1998, Messrs. Rosenthal and Haig were each granted stock options to purchase
20,000 shares of Common Stock at an exercise price of $0.78 under the Stock
Option Plan for Non-Employee Directors. Twenty-five percent (25%) of such
options vested upon issuance and twenty-five percent (25%) vest on the first,
second and third anniversary of the date of issuance. In addition, Scott A.
Katzmann, a former director of the Company, was granted an option to purchase
15,000 shares of Common Stock with an exercise price of $0.78 outside of the
Company's stock option plans.
Also on January 27, 1998, Messrs. Murchie and Jellum were each granted stock
options to purchase 100,000 shares of Common Stock at an exercise price of
$0.78. Thirty-three percent (33%) of such options vest on the first, second and
third anniversary of the date of issuance. Mr. Jellum's options expired in
connection with the termination of his employment with the Company in October
1998.
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Also on January 27, 1998, the Board repriced options to purchase 300,000 shares
of Common Stock held by each of Mr. Beck and Mr. Amt from $1.375 to $0.78 per
share (the last reported sale price of the Common Stock as of such date) under
its 1996 Long-Term Employee Incentive Plan, and options to purchase an aggregate
of 21,580 shares of Common Stock outstanding under the Stock Option Plan for
Non-Employee Directors held by Mr. Beck, Mr. Haig and Mr. Rosenthal from
exercise prices ranging from $3.125 to $5.00 to an exercise price of $0.78 per
share.
Irwin M. Rosenthal, a director of the Company, is a partner of Graham & James
LLP, special counsel to the Company. As of September 30, 1999, the Company is
indebted to Graham & James LLP for legal fees in excess of $323,000 for which
the Company has agreed to give a security interest. See also "Executive
Compensation Compensation of Directors" and "Security Ownership of Certain
Beneficial Owners and Management."
Item 13. Exhibits, List and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description of Exhibit
- ------ ----------------------
2.1* Agreement and Plan of Reorganization dated August 16, 1994,
among the Company, CTI Acquisition Corporation, Dunkirk and
certain stockholders of Dunkirk listed on the signature pages
thereto
3.1* Amended and Restated Certificate of Incorporation of the
Company
3.2** Certificate of Designation of Series A Convertible Preferred
Stock
3.2.1 Certificate of Designation of Series B Convertible Preferred
Stock
3.3* By-laws of the Company
3.4**** Certificate of Amendment to the Restated Certificate of
Incorporation of the Company
3.5 Certificate of Merger of CTI Subsidiary Corp. With and Into
the Company and Agreement and Plan of Merger between the
Company and CTI Subsidiary Corp..
4.3* Term Note No. 2 dated as of January 27, 1995, between Key Bank
of New York and Dunkirk
4.4* Security Agreement dated as of January 27, 1995, between Key
Bank of New York and Dunkirk
10.1* Conversion Technologies International, Inc. 1994 Employee
Stock Option Plan, As Amended
10.2* Conversion Technologies International, Inc. 1994 Stock Option
Plan for Non-Employee Directors, As Amended
10.3** Conversion Technologies International, Inc. 1996 Long-Term
Employee Incentive Plan, As Amended
38
<PAGE>
10.4** Consulting Agreement dated March 1, 1995 between the Company
and Eckardt C. Beck, As Amended
10.5** Employment Agreement dated as of August 1, 1997 between the
Company and William L. Amt.
10.18* Project Development Assistance Agreement dated July 13, 1995,
among the Company, Technology Funding Partners III, L.P. and
Technology Funding Venture Partners V, An Aggressive Growth
Fund, L.P.
10.19** Technology Purchase Agreement dated as of June 30, 1997
between Advanced Particle Technologies, Inc. and Vangkoe
Industries, Inc.
10.20** Distributor Agreement dated as of June 30, 1997 between
Advanced Particle Technologies, Inc. and Vangkoe Industries,
Inc.
10.21* Consulting Agreement dated as of May 5, 1995, among the
Company, Technology Funding Partners III, L.P. and Technology
Funding Venture Partners V, An Aggressive Growth Fund, L.P.
10.22* Registration Rights Agreement dated as of May 5, 1995, among
the Company, Technology Funding Partners III, L.P. and
Technology Funding Venture Partners V, An Aggressive Growth
Fund, L.P.
10.25** Warrant for the Purchase of Shares of Series A Convertible
Preferred Stock issued to Paramount Capital, Inc. by the
Company
10.26* Series A Preferred Stock Purchase Agreement dated as of May 5,
1995, among the Company, Technology Funding Partners 111, L.P.
and Technology Funding Venture Partners V, An Aggressive
Growth Fund, L.P.
10.27** Form of Placement Agency Agreement between the Company and
Placement Agent.
10.28** Form of Subscription Agreement between the Company and various
subscribers of Series A Preferred Stock.
10.29** Form of Placement Agent Warrant.
10.30** Form of Financial Advisory Services Agreement between the
Company and Placement Agent.
10.31** Form of Warrant issued in connection with Senior Secured Line
of Credit Agreement.
10.32** Letter from Empire State Development Corporation ("ESDC") to
Dunkirk dated July 22, 1997 confirming its guarantee of the
Key Bank Note
10.33** Letter from Key Bank to ESDC dated July 30, 1997 confirming
that it will not exercise any remedies under the Key Bank Note
and will execute documents to assign the Key Bank Note to ESDC
10.34*** Senior Secured Line of Credit Agreement dated as of May 8,
1998 by and among Aries Domestic Fund, L.P., The Aries Fund,
Dunkirk, APT and the Company
39
<PAGE>
10.34.1 Form of Senior Secured Notes issued to The Aries Master Fund
aggregating $910,000 in principal amount.
10.34.2 Form of Senior Secured Notes issued to the Aries Domestic
Fund, L.P. aggregating $380,000 in principal amount
10.35**** Security Agreement dated as of May 8, 1998 among the Company,
Dunkirk, APT and Paramount Capital Asset Management, Inc.
10.36**** Subsidiary Guarantee dated as of May 8, 1998 by Dunkirk and
APT in favor of The Aries Fund and Aries Domestic Fund, L.P.
10.37**** Promissory Note dated as of February 23, 1999 issued by the
Company in favor of Eckardt C. Beck
10.38**** Termination Agreement dated as of January 1, 1998 by and
between the Company and Jack D. Hays, Jr.
10.39**** Termination Agreement dated as of January 1, 1998 by and
between the Company and Richard H. Hughes
10.40**** Consulting Agreement dated December 22, 1998 by and between
the Company and 4C Technologies, Inc.
10.41**** Amendment dated as of May 8, 1998 to the Technology Purchase
Agreement dated as of June 30, 1997 by and between APT and
VANGKOE
10.42**** Termination Agreement dated as of May 8, 1998 by and between
APT and VANGKOE
10.43**** Materials Bill of Sale Agreement dated as of May 8, 1998 by
and between the Company and VANGKOE
10.44**** Ceramaglass Trademark & Intellectual Property Agreement dated
as of May 8, 1998 by and between the Company and VANGKOE
10.45**** Ceramaquartz Trademark & Intellectual Property Agreement dated
As of May 8, 1998 by and between the Company and VANGKOE
10.46**** Letter Agreement of the Company dated March 11, 1998 with
Dlubak
10.47**** Lease dated April 1, 1998 by and between 312 Industrial Park
and the Company
10.48**** Lease dated April 1, 1998 by and between Willard Park Inc. and
the Company
10.49**** Manufacturer Representative Agreement dated as of January 1,
1998 by and between the Company and Engineered Products Sales
Associates
10.50**** Manufacturer Representative Termination Agreement dated as of
January 1, 1998 by and between the Company and Engineered
Products Sales Associates
10.51 Form of Subscription Agreement between the Company and various
Subscribers of the Series B Convertible Preferred Stock.
40
<PAGE>
10.52.1 Form of Convertible Promissory Note issued by the Company in
favor of The Aries Master Fund aggregating $109,500 in
principal amount.
10.52.2 Form of Convertible Promissory Note issued by the Company in
favor of the Aries Domestic Fund, L.P. aggregating $60,500 in
principal amount.
10.53 Lease dated September 17, 1999 by and between Dunkirk
International Glass & Ceramics Corp. And Red Wing Company,
Inc.
11 Statement of Computation of Net Loss Per Share
21** Subsidiaries of the Company
27 Financial Data Schedule for the year ended June 30, 1999
* Incorporated by reference to the exhibits to the Company's
Registration Statement on form SB-2, Registration No.
333-00756.
** Incorporated by reference to the exhibits to the Company's
Annual Report on form 10-KSB for fiscal 1997.
*** Incorporated by reference to the exhibits to the Company's
Annual Report on form 10-QSB for the quarterly period ended
March 31, 1998.
**** Incorporated by reference to the exhibit to the Company's
Annual Report on form 10-KSB for fiscal 1998.
All other Exhibits filed herewith.
(b) Reports on Form 8-K
None.
41
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Dated: November 2, 1999 Conversion Technologies International, Inc.
By: /s/ Eckardt C. Beck
-------------------
Eckardt C. Beck
Acting President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/Eckardt C. Beck Acting President, Chief November 2, 1999
--------------------------- Executive Officer and Director
Eckardt C. Beck (principal executive officer)
/s/ John G. Murchie Acting Chief Financial Officer November 2, 1999
--------------------------- and Controller (principal
John G. Murchie accounting officer)
/s/ Eckardt C. Beck Chairman of the Board November 2, 1999
---------------------------
Eckardt C. Beck
/s/ Stephen D. Fish Director November 2, 1999
---------------------------
Stephen D. Fish
/s/ Peter H. Gardner Director November 2, 1999
---------------------------
Peter H. Gardner
/s/ Alexander P. Haig Director November 2, 1999
---------------------------
Alexander P. Haig
--------------------------- Director
Douglas M. Costle
/s/Irwin M. Rosenthal, Esq. Director November 2, 1999
---------------------------
Irwin M. Rosenthal, Esq.
</TABLE>
42
<PAGE>
Conversion Technologies International, Inc.
and Subsidiaries
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors ..................................................... F-2
Consolidated Balance Sheets of Conversion Technologies International, Inc. and
Subsidiaries as of June 30, 1999 and June 30, 1998 .......................... F-3
Consolidated Statements of Operations of Conversion Technologies International, Inc,
and Subsidiaries for the years ended June 30, 1999 and June 30, 1998 ........ F-4
Consolidated Statements of Stockholders' Deficiency of Conversion Technologies
International, Inc. and Subsidiaries for the years ended June 30, 1999
and June 30, 1998 ........................................................... F-5
Consolidated Statements of Cash Flows of Conversion Technologies International, Inc.
and Subsidiaries for the years ended June 30, 1999 and June 30, 1998 ........ F-6
Notes to Consolidated Financial Statements ......................................... F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Conversion Technologies International, Inc.
We have audited the accompanying consolidated balance sheets of Conversion
Technologies International, Inc. and Subsidiaries as of June 30, 1999 and 1998,
and the related consolidated statements of operations, stockholders' deficiency
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Conversion
Technologies International, Inc. and Subsidiaries as of June 30, 1999 and 1998,
and the consolidated results of their operations and cash flows for the years
then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1, the
Company has generated only minimal revenue, has incurred significant losses, has
a working capital deficit, stockholders' deficiency, and is in default in
payment of substantially all of its debt. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the possible inability of the
Company to continue as a going concern.
BDO Seidman, LLP
October 7, 1999
F-2
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
1999 1998
-----------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 60,954 $ 168,483
Accounts receivable, less allowance for doubtful accounts of $68,146
and $18,000 104,350 258,990
Inventories 283,029 466,062
Prepaid expenses and other current assets 156,701 94,596
-----------------------------
Total current assets 605,034 988,131
Property, plant and equipment:
Land 75,000 --
Building and improvements 675,000 --
Machinery and equipment 1,022,053 702,614
-----------------------------
1,772,053 702,614
Less accumulated depreciation (269,841) (148,057)
-----------------------------
1,502,212 554,557
Property, plant and equipment held for sale at estimated disposal value -- 1,000,000
Other assets, less accumulated amortization of $123,346 and $97,811 106,398 132,783
-----------------------------
$ 2,213,644 $ 2,675,471
=============================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Notes payable $ 121,915 $ --
Accounts payable 1,495,153 1,102,394
Reserve for disposal 301,000 515,000
Accrued expenses 994.559 394,163
Investment tax credit payable 235,000 235,000
Current portion of capital lease obligations 14,688 23,965
Current portion of long-term debt 2,514,496 2,524,255
-----------------------------
Total current liabilities 5,676,811 4,794,777
Capital lease obligations, less current portion -- 15,235
Long-term debt, less current portion 1,528,085 502,000
Stockholders' deficiency:
Series A Convertible Preferred Stock, $.001 par value,
authorized 880,000 shares, issued and outstanding
545,830 and 613,280 shares 546 614
Common Stock, $.00025 par value, authorized 50,000,000
shares, issued and outstanding 6,947,045
and 5,600,545 shares 1,737 1,400
Additional paid-in capital 33,353,485 32,876,274
Unearned stock compensation (57,246) (207,000)
Accumulated deficit (38,289,774) (35,307,829)
-----------------------------
Total Stockholders' deficiency (4,991,252) (2,636,541)
-----------------------------
$ 2,213,644 $ 2,675,471
=============================
</TABLE>
See accompanying notes.
F-3
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended June 30,
1999 1998
---------------------------
<S> <C> <C>
Revenue
Product sales $ 1,103,965 $ 1,535,159
Recycling fees 15,517 362,821
---------------------------
Total revenue 1,119,482 1,897,980
Cost of goods sold 1,250,762 2,703,441
---------------------------
Gross loss on sales (131,280) (805,461)
Selling, general and administrative expenses 1,506,241 2,723,462
Write down of property plant and equipment held for sale -- 4,913,422
---------------------------
Loss from operations (1,637,521) (8,442,345)
Interest expense (477,019) (552,300)
Interest income 3,550 82,316
Other income 5,242 246,051
---------------------------
Loss before extraordinary item (2,105,748) (8,666,278)
Extraordinary item - gain on debt retirement -- 6,425,004
---------------------------
Net loss (2,105,748) (2,241,274)
Preferred stock dividends (1,182,102) (3,032,318)
---------------------------
Net loss applicable to Common Stock $(3,287,850) $(5,273,592
===========================
Basic Loss Per Common Share:
Loss before extraordinary item $ (0.64) $ (2.44)
Extraordinary item -- 1.34
---------------------------
Net Loss applicable to Common Stock $ (0.64) $ (1.10)
===========================
Weighted average number of common shares outstanding 5,133,200 4,804,427
===========================
</TABLE>
See accompanying notes.
F-4
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
YEARS ENDED JUNE 30, 1999 AND JUNE 30, 1998
<TABLE>
<CAPTION>
Series A Preferred Stock
---------------------------------------------
Additional
Number Paid-In
of Shares Amount Capital
---------------------------------------------
<S> <C> <C> <C>
Balance at July 1, 1997 -- $ -- $ --
Issuance of series A preferred stock 619,360 620 5,186,283
Series A preferred stock converted
into Common Stock (6,080) (6) (60,794)
Stock compensation -- -- --
Common stock warrants granted to
Lenders -- -- --
Common stock options granted to
Employees and directors -- -- --
Dividend attributable to beneficial --
conversion feature of convertible
preferred stock -- -- 3,032,318
Net Loss -- -- --
---------------------------------------------
Balance at June 30, 1998 613,280 $ 614 $ 8,157,807
Series A Preferred Stock converted into
Common Stock (67,450) (68) (1,018,910)
Stock compensation -- -- --
Common Stock options canceled -- -- --
Dividend attributable to beneficial
conversion feature of convertible
preferred stock -- -- 876,197
Preferred Stock dividends -- -- (305,905)
Net Loss -- -- --
---------------------------------------------
Balance at June 30, 1999 545,830 $ 546 $ 7,709,189
=============================================
<CAPTION>
Common Stock
----------------------------------------
Total
Additional Unearned Stockholders'
Number Paid-In Stock Accumulated Equity
of Shares Amount Capital Compensation Deficit (Deficiency)
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1997 5,539,745 $ 1,385 $ 24,186,932 $(116,369) - $(30,034,237) $ (5,962,289)
Issuance of series A preferred stock -- -- -- -- -- 5,186,903
Series A preferred stock converted
into Common Stock 60,800 15 60,785 -- -- --
Stock compensation -- -- -- 116,369 -- 116,369
Common stock warrants granted to
Lenders -- -- 205,600 -- -- 205,600
Common stock options granted to
Employees and directors -- -- 265,150 (207,000) -- 58,150
Dividend attributable to beneficial
conversion feature of convertible
preferred stock -- -- -- -- (3,032,318)
Net Loss -- -- -- -- (2,241,274) (2,241,274)
----------------------------------------------------------------------------------
Balance at June 30, 1998 5,600,545 $ 1,400 $ 24,718,467 $ (207,000) $(35,307,829) $ (2,636,541)
Series A Preferred Stock converted into
Common Stock 1,346,500 337 1,018,641 -- -- --
Stock compensation -- -- -- 56,942 -- 56,942
Common Stock options canceled -- (92,812) 92,812 -- --
Dividend attributable to beneficial
conversion feature of convertible
preferred stock -- -- -- -- (876,197) --
Preferred Stock dividends -- -- -- -- -- (305,905)
Net Loss -- -- -- -- (2,105,748) (2,105,748)
----------------------------------------------------------------------------------
Balance at June 30, 1999 6,947,045 $ 1,737 $ 25,644,296 $ (57,246) $(38,289,774) $ (4,991,252)
==================================================================================
</TABLE>
See accompanying notes
F-5
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------
Operating activities 1999 1998
----------- -----------
<S> <C> <C>
Net loss $(2,105,748) $(2,241,274)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation expense 138,455 817,928
Amortization expense 25,535 39,543
Amortization of discount on notes payable 108,000 97,600
Bad debt expense 53,691 --
Loss on disposal of equipment -- 22,857
Extraordinary item -- (6,425,004)
Write-off of impaired inventory 80,180
Write-down of property, plant and equipment -- 4,913,422
Stock compensation expense 56,942 174,519
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 100,949 (112,765)
Decrease in inventories 102,853 54,998
(Increase) decrease in prepaid expenses and other current assets (62,105) 93,929
(Increase) decrease in other assets 850 (57,016)
Decrease in deferred revenue -- (491,944)
(Decrease) increase in accounts payable, reserve for
disposal and other accrued expenses 473,250 (968,423)
----------- -----------
Net cash used in operating activities (1,027,148) (4,081,630)
Investing activities
Capital expenditures (87,321) (372,572)
Proceeds from disposals of equipment 1,211 3,590
----------- -----------
Net cash used in investing activities (86,110) (368,982)
Financing activities
Issuance of notes payable 1,062,778 1,110,000
Payment of notes payable (22,778) (500,000)
Decrease in restricted assets -- 675,285
Principal payments on long-term debt (9,759) (2,142,476)
Principal payments under capital lease obligations (24,512) (35,709)
Issuance of series A preferred stock, net of offering costs -- 5,186,903
----------- -----------
Net cash provided by financing activities 1,005,729 4,294,003
----------- -----------
Decrease in cash and cash equivalents (107,529) (156,609)
Cash and cash equivalents at beginning of period 168,483 325,092
----------- -----------
Cash and cash equivalents at end of period $ 60,954 $ 168,483
=========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
Supplemental disclosure of cash flow information
Interest paid $ 74,297 $ 528,875
========== ==========
Supplemental disclosure of non cash transactions
Issuance of warrants in connection with bridge notes -- 76,000
Issuance of warrants in connection with line of credit -- 129,600
Preferred stock converted into common stock 1,018,978 60,800
Discount on stock options granted to employees and directors -- 205,150
Compensation charged for modification in exercise price of
director stock options -- 60,000
Amortization of discount on series A preferred stock 876,197 3,032,318
Reclassification of property, plant and equipment held for sale to
property, plant and equipment 1,000,000 --
Reclassification of property, plant and equipment to property, plant and
equipment held for sale -- 1,000,000
Dividends accrued on Series A Preferred Stock 305,905 --
</TABLE>
See accompanying notes.
F-7
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
1. Organization
Conversion Technologies International, Inc. (the "Company") is engaged in the
business of manufacturing and processing various substrates and advanced
materials. These substrates and materials include (i) decorative particles that
visually enhance structural materials such as plasters, tiles, grouts, wall
systems and roofing and flooring; and (ii) performance aggregates which can be
used as structural and textural enhancers, fillers and additives and to
strengthen and add consistency to materials such as cements, plasters, grouts,
roofing and flooring and glass and ceramic materials. The Company was also
engaged in the business of recycling cathode ray tube ("CRT") glass produced in
the manufacture of televisions for resale to such manufactures and others and
manufacturing and processing industrial abrasives which can be used for surface
cleaning and surface preparation applications such as in cleaning steel
structures, railcars, aircraft parts, and equipment in loose grain blasting
operations.
The accompanying consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the liquidation
of liabilities in the ordinary course of business. The Company has had limited
revenue and has incurred significant losses which has resulted in a working
capital deficiency and a stockholders' deficiency. The Company does not
currently possess sufficient funds to conduct its business and satisfy its
liabilities. The Company has significant past due payables and is in default in
payment of principal and interest on substantially all of its indebtedness for
borrowed money. On September 24, 1999(see Note 11), the Company sold in a
Private Placement 4,802,967 shares of Series B Convertible Preferred Stock for
which the Company accepted $1,115,000 in cash and the cancellation of $1,767,000
of debt including accrued interest. From the cash proceeds, $600,000 was paid to
Empire State Development Corporation ("ESDC") in full satisfactions of loans
with principal balances of $1,220,980. This conversion and pay-off of debt
totaling $2,987,980 of the Company's total debt of $4,164,496 will significantly
reduce interest expense which was approximately $477,000 for the year ended June
30, 1999. In September 1999, the Company leased a portion of its vacant Dunkirk
plant and is exploring various alternatives for the use of the remaining portion
of the plant to generate additional revenues. Also in September 1999 the Company
entered into a distribution agreement with a major building products supplier
for the sale and distribution of decorative particles for the pool industry
which could significantly increase that business.
Although management believes that as a result of the above Private Placement
that occured subsequent to year end and if all of the foregoing courses of
action are achieved, it would allow the Company to continue as a going concern
for the next year, there are no assurances that management will be successful in
implementing all of these plans and eliminating the substantial doubt as to its
ability to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments relating to the realization of assets
and liquidation of liabilities that might be necessary should the Company be
unable to continue as a going concern.
F-8
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and include the
accounts of Conversion Technologies International, Inc. and its wholly-owned
subsidiaries, Dunkirk International Glass and Ceramics Corporation ("Dunkirk")
and Advanced Particle Technologies, Inc. (APT). Intercompany accounts and
transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
which effect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Revenue Recognition
With respect to revenue from product sales, including products created from
processed waste materials, revenue is recognized only upon shipment of products
to customers. The Company in fiscal 1998 derived most of its revenue from fees
charged to accept waste materials and from the sale of its products. With
respect to revenue from fees charged to accept waste materials, the Company
initially recorded the fees it received for accepting waste materials for
processing as deferred revenue. After the materials had been processed into
finished goods inventory or sold after preliminary processing, the deferred
revenue was recognized as fee revenue based upon the amount of finished goods
inventory produced (by tonnage), valued at the fee charged for accepting the
waste material.
For the year ended June 30, 1999, 57.9% of the Company's revenue was derived
from two major customers. Revenue generated from each of these customers
amounted to $382,622 and $265,792, which represents 34.2% and 23.7% of total
revenue, respectively.
For the year ended June 30, 1998, 69.0% of the Company's revenue was derived
from three major customers. Revenue generated from each of those customers
amounted to $893,747, $219,958 and $196,431, which represents 47.1%, 11.6% and
10.3% of total revenue, respectively.
Reserve for Disposal
Dunkirk, a wholly-owned subsidiary of the Company, began accepting waste
materials (primarily CRT glass) in early 1994. Upon accepting the waste
materials, Dunkirk established a reserve for the probable disposal and cleanup
costs for the unprocessed waste materials on hand in the event the conversion
processes being developed were not successful. To date, the Company has disposed
of 2,357 tons of the waste materials, which it had not been able to process, of
which 1,137 tons were disposed of during the year ended June 30, 1998 and 1,220
tons were disposed of during the year ended June 30, 1999. The amount of
unprocessed waste materials on hand was 843 tons at June 30, 1999 and 2,035 tons
at June 30, 1998. From July 1, 1997 to June 30, 1998, the Company decreased the
reserve by approximately $198,000, from $713,000 to $515,000. From July 1, 1998
to June 30, 1999, the
F-9
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies (continued)
Company reduced the reserve by approximately $214,000 from $515,000 to $301,000.
The decreases in the reserve, which resulted from reductions in the quantities
of unprocessed waste materials on hand, have been credited against operations.
The Company intends to adjust the reserve for disposal if and when it can
further reduce the quantities of unprocessed waste materials on hand.
Inventories
Inventories are valued at the lower of cost or market, with cost determined by
the first-in, first-out (FIFO) method.
Inventories consisted of the following:
June 30,
1999 1998
---- ----
Raw Materials $ 35,562 $125,409
Work-in-process 20,707 147,291
Finished goods 226,760 193,362
-------- --------
$283,029 $466,062
======== ========
Impairments
Assets are evaluated for impairment when events change or changes in
circumstances indicate that the carrying amounts of the assets may not be
recoverable. When any such impairment exists, the related assets are written
down to fair value.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
June 30,
1999 1998
---- ----
Private placement expenses $ 98,561 $ --
Prepaid insurance, real estate
taxes and other expenses 39,779 53,605
Other 18,361 40,991
-------- --------
$156,701 $ 94,596
======== ========
F-10
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies (continued)
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation and amortization
are computed on the straight-line method over the estimated useful lives of the
assets. Amortization on assets under capital leases is provided on a
straight-line basis over the lesser of the useful lives of the related assets or
the terms of the leases. The estimated useful lives of the assets are as
follows:
Buildings and Improvements 5 to 31 1/2 years
Machinery and Equipment 2 to 10 years
In October of 1998, the Company ceased operations at the Dunkirk plant and
decided to dispose of all the property, plant and equipment at that facility and
was actively searching for a buyer. In the fourth quarter of 1998, pursuant to
FAS 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", the Company had adjusted those assets to their
estimated net realizable value. This resulted in a write down of land and
building and improvements during fiscal 1998 of approximately $716,000 to
$750,000 and machinery and equipment of approximately $4,197,000 to $250,000
resulting in a combined estimated disposal value of $1,000,000, which had been
classified as held for sale on the accompanying consolidated balance sheet at
June 30, 1998.
On September 17, 1999 the Company leased a portion of the Dunkirk plant and is
currently exploring various alternatives for the use of the remaining portion.
Also the Company is planning to sell a minor portion of the equipment that it
does not anticipate will be used in planned future operations of the facility.
As a result of the Company abandoning its plans to dispose of the facility and
its plans to resume operations, the remaining carrying value of land; $75,000,
building and improvements; $675,000 and machinery and equipment of $206,588 were
classified as property, plant and equipment at June 30, 1999. Since the above
assets were idle, no depreciation was provided for during fiscal 1999.
Cash Equivalents
The Company considers all highly-liquid investments with an original maturity of
three months or less to be cash equivalents.
Other Assets
Other assets include deferred financing costs, trademarks and security deposits
for rental property. Deferred financing costs relate to various loan agreements
which have been capitalized and are being amortized over the term of the loans
(See Note 3). Trademarks are carried at cost and amortized on a straight-line
basis over the estimated useful life of the trademarks.
F-11
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies (continued)
Accrued Expenses
Accrued expenses consisted of the following:
June 30,
1999 1998
----------------------
Accrued interest $477,075 $182,353
Accrued dividends 305,905 --
Accrued payroll taxes and employee benefits 65,919 72,420
Accrued audit and tax fees 66,000 66,000
Accrued salaries and wages 25,794 44,482
Accrued royalties 36,319 11,372
Accrued other 17,547 17,536
-------- --------
$994,559 $394,163
======== ========
Income Taxes
Deferred income tax assets and liabilities are recorded for differences between
the financial statement and tax bases of assets and liabilities that will result
in taxable or deductible amounts in the future based on enacted tax laws and
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Investment Tax Credit
The Company received a gross cash refund of $566,547 related to a New York State
investment tax credit in June 1997. However, the Company has recorded a $235,000
reserve against this amount as the Company may be required to refund such amount
pursuant to a recapture provision.
F-12
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies (continued)
Extraordinary Items
In September 1997, the holders of Dunkirk's $8,000,000 Chautauqua County
Industrial Development Agency Solid Waste Disposal Facility Bonds (the "IDA
Bonds") retired the IDA Bonds in exchange for a cash payment of $1,620,000 and
the balance of the related debt service reserve fund of $194,000. The cash
payment was made utilizing proceeds from the private placement discussed in Note
7 below. The Company also wrote off approximately $324,000 of deferred financing
costs relating to such debt. This forgiveness resulted in a net pretax gain to
the Company of approximately $5,862,000, which is reported as an Extraordinary
Item for the year ended June 30, 1998.
In December 1997, the Empire State Development Corporation / JDA (the "ESDC"),
which had previously assumed approximately $1,888,000 of debt plus accrued
interest of approximately $82,000 owed by Dunkirk to Key Bank of New York ("Key
Bank"), granted the Company a debt forgiveness of $500,000. Also, the balance of
the related debt service reserve fund of approximately $459,000 was applied
against the outstanding principal and accrued interest. ESDC has also agreed to
defer all interest payments due under the loan through July 1, 1998 and to defer
all principal payments due under the loan through January 1, 1999 with interest
continuing to accrue on such deferred amounts payable monthly beginning July
1998 through December 2001. This forgiveness resulted in a net pretax gain to
the Company of approximately $221,000 ($0.05 per share), which is reported as an
Extraordinary Item for the year ended June 30, 1998.
During fiscal 1998, the Company also negotiated various settlements with certain
of its vendors. These settlements resulted in the vendors forgiving
approximately $292,000 in accounts payable which resulted in a pretax gain to
the Company of the same amount that is reported as an Extraordinary Item for the
year ended June 30, 1998.
To the extent that Dunkirk is deemed to be insolvent immediately prior to any of
these debt forgiveness by an amount which equals or exceeds the amount of debt
forgiveness, the Company will not recognize taxable income from such
forgiveness; however, certain of Dunkirk's tax attributes (such as net operating
loss carry forwards ("NOLs") would be subject to reduction and would not be
available to offset future income from operations, if any. For this purpose, the
amount of insolvency is defined to be the excess of Dunkirk's liabilities over
the fair value of its assets. An independent appraisal of the fair value of
Dunkirk's assets has not been completed at this time to determine Dunkirk's
solvency; however, the Company believes that Dunkirk was insolvent at the time
of forgiveness, and accordingly has not recorded a tax provision on the
Extraordinary Item. If Dunkirk is deemed to be solvent immediately prior to the
time of the forgiveness, the Company will recognize taxable income for the debt
forgiveness in its tax year ending June 30, 1998. The amount of such income may
be offset by NOLs, subject to possible limitations as discussed in Note 8. Even
if sufficient NOLs were available to offset such taxable income after such
limitations, the Company may be subject to alternative minimum tax.
F-13
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies (continued)
Net Loss Per Common Share
Basic net loss per common share is based on the net loss attributable to common
stockholders for the year, divided by the weighted average number of common
shares outstanding during the year (excluding 740,559 common shares that were
deposited into escrow in connection with the Company's initial public offering).
Potential common shares have not been included since their effect would be
antidilutive. Common shares that could be potentially dilutive include 1,054,817
stock options, 29,376,661 warrants and 10,916,600 shares underlying the Series A
Preferred Stock, after giving effect to the reset of the conversion price of the
Series A Preferred Stock (see Note 7) and any shares issued upon the conversion
of the amounts borrowed plus interest under the Line of Credit and interim
financing (see Note 4) which, subsequent to year end, were converted into Series
B Convertible Preferred Stock (see Note 11).
Fair Value of Financial Instruments
Fair value estimates discussed herein are based upon certain market assumptions
and pertinent information available to management as of June 30, 1999. The
respective carrying value of certain on balance sheet financial instruments
approximated their fair values. These financial instruments include cash and
cash equivalents, accounts receivable, accounts payable and accrued expenses.
The fair value of the Company's long-term debt is estimated based upon the
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities. The carrying
value approximates the fair value of the debt.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"). FAS 133 requires companies to recognize all
derivative contracts as either assets or liabilities in the balance sheet and to
measure them at fair value. FAS 133, as amended by FAS 137, is effective for
periods beginning after June 15, 2000. Historically, the Company has not entered
into derivative contracts. Accordingly, FAS 133 is not expected to affect the
Company's financial statements.
Reclassifications
Certain reclassifications have been made to the prior year financial statements
to conform to the current year presentation.
F-14
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Debt
Long-term debt consists of the following obligations as of June 30, 1999 and
1998:
<TABLE>
<CAPTION>
June 30,
1999 1998
---- ----
<S> <C> <C>
Company - Notes payable under a Senior Secured Line of Credit
Agreement and the interim financing agreement dated February 22, 1999
with two stockholders which were converted subsequent to year end into
Series B Convertible Preferred Stock (see Notes 4 and 11) $1,425,000 $ 502,000
Company - Portion of note payable to the Acting President and Chief
Executive Officer which was converted subsequent to year end into
Series B Convertible Preferred Stock (see Notes 4 and 11) 103,085 --
Dunkirk-Chautauqua Region Industrial Development Corporation
(CRIDA) mortgage note collateralized by a mortgage on real property,
payable interest only through December 1, 1998 and beginning January
1, 1999 in monthly installments of $4,880 including interest at a variable
rate (6% at June 30, 1999) through October 1, 2004. Repayment is
guaranteed by the Company 287,648 287,648
Dunkirk-Term loan with the New York State Job Development Authority (JDA)
payable interest only through December 1, 1998 and beginning January 1,
1999 in monthly installments of $29,308 including principal and interest
at the prime rate (7.75% at June 30, 1999) through December 27, 2001. A
portion of this loan was paid off and the
remaining balance forgiven subsequent to year end (see Note 11) 1,183,110 1,183,110
Dunkirk- Subordinated mortgage note collateralized by a mortgage on real
property, payable in monthly installments of $4,956 including interest
at 10% through January 21, 2004 253,638 256,457
Dunkirk-Chautauqua County Industrial Development Agency (CCIDA) subordinated
note payable in monthly payments of $1,485 including interest at 7% and was
due June 1, 1999. The note contains various restrictive covenants, is
guaranteed by the former Dunkirk president and is collateralized by a
subordinated security interest in certain machinery
and equipment 12,984 17,163
</TABLE>
F-15
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Debt (continued)
<TABLE>
<CAPTION>
June 30
1999 1998
---- ----
<S> <C> <C>
Dunkirk-Southern Tier Enterprise Development
Organization (STEDO) subordinated note payable in
monthly payments of $1,169 including interest at
8% through July 1, 2002. The note contains various
restrictive covenants, is guaranteed by the former
Dunkirk president and is collateralized by a
subordinated security interest in certain equipment 35,457 38,218
Dunkirk-New York Job Development Authority (Al Tech)
subordinated note payable interest only through
December 1, 1998 and beginning January 1, 1999 in
monthly payments of $4,296 including interest at 5%
through September 1, 1999. The note contains various
restrictive covenants, is guaranteed by the Company and
by the former Dunkirk president and is collateralized by
a subordinated security interest in certain equipment 37,870 37,870
</TABLE>
F-16
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Debt (continued)
<TABLE>
<CAPTION>
June 30
1999 1998
---- ----
<S> <C> <C>
Dunkirk-Subordinated unsecured debt from various electronic companies; 0I-NEG TV
Products, Inc. (Techneglas), Thomson Consumer Electronics, Sanyo
Manufacturing Corp., Toshiba Display Devices and Hitachi Electronic Devices
(USA), begin with quarterly payments of interest only at prime plus 2%
(9.75% at June 30, 1999) through a range of dates ending January 1, 1999
Beginning between March 31, 1998 and April 1, 1999 and going through a
range of dates with the final subordinate debt issue ending January 1, 2004
quarterly installments of principal plus interest at prime plus 2% are
payable. The first five quarterly interest payments for a portion of the
debt has been converted by the Company into subordinated notes ($43,789
converted at June 30, 1999) payable in quarterly payments of interest only
at 8% for nineteen quarters and the principal amount plus interest being
due between April 1, 1999 through April
1, 2000 703,789 703,789
---------- ----------
Total Debt 4,042,581 3,026,255
Less Current Maturities 2,514,496 2,524,255
---------- ----------
$1,528,085 $ 502,000
========== ==========
</TABLE>
The Company has agreed to indemnify and hold harmless the former Dunkirk
president with respect to guarantees made by him for obligations of Dunkirk. In
addition, the Company has agreed to use its reasonable efforts to cause the
release of such guarantees. At June 30, 1999 and 1998, the Company was in
violation of certain loan covenants and was in default in payment of principal
and interest, related to the above debt, and as a result all of the above
Dunkirk debt has been classified as a current liability at June 30, 1999 and
1998. The above Company notes payable which were converted subsequent to year
end into Series B Convertible Preferred Stock have been classified as long term
debt at June 30, 1999 and 1998.
F-17
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Notes Payable
In July and August of 1997 the Company borrowed and repaid from two significant
stockholders of the Company a total of $500,000 for working capital purposes,
and in connection therewith, issued warrants to purchase 198,863 shares of
Common Stock at an exercise price equal to $0.66 (after giving effects to
antidilution adjustments resulting from the sale of Series A Preferred Stock,
the issuance of the additional shares of Series A Preferred Stock and the reset
of the conversion price of the Series A Preferred Stock described in Note 7).
These Common Stock warrants were valued at $76,000 in accordance with the
provisions of FAS 123. This amount was recorded as debt discount and was
amortized in fiscal 1998.
On May 8, 1998, the Company entered into a Senior Secured Line of Credit
Agreement (the "Credit Agreement") with two significant stockholders of the
Company. The Credit Agreement provided for a line of credit (the "Line of
Credit") of up to $1,200,000 pursuant to which the Company could draw down up to
$300,000 per month, although draw downs beyond the initial $300,000 draw would
be at the discretion of the lenders. The Line of Credit is secured by the
receivables and inventory of the Company and its subsidiaries. Amounts borrowed
under the Line of Credit accrue interest at an annual rate of 12%. As of
December 15, 1998, the Line of Credit was amended to increase the amount
available thereunder by $90,000. The Line of Credit, as amended, matures on the
earlier of September 1, 1999 or the completion of any financing of at least
$2,790,000. At June 30, 1998, the Company had borrowed $610,000 under the Credit
Agreement and as of January 13, 1999 had borrowed the full $1,290,000 that was
available.
The Credit Agreement contains customary covenants and default provisions. In
addition, upon an Event of Default (as defined in the Credit Agreement), but
only after a 60-day cure period, the lenders were entitled to appoint a majority
of the Board of Directors. In addition, upon an Event of Default, but only after
a 90-day cure period, the lenders could convert any outstanding principal amount
plus interest, into shares of Common Stock of the Company at the then fair
market value of the Common Stock.
In addition, the Company issued to the lenders warrants to purchase an aggregate
of 385,075 shares of Common Stock at an exercise price equal to $0.67 (the
closing price of the Common Stock on the date of issuance after adjustment for
the reset of the conversion price of the Series A Preferred Stock described in
Note 7.), subject to vesting. Of such warrants, warrants to purchase 29,850
shares of Common Stock vested with respect to each $100,000 (or ratable portion
thereof) that was drawn under the Credit Agreement. These Common Stock warrants
were valued at $129,600 in accordance with the provisions of FAS 123 and this
amount was recorded as debt discount during fiscal 1998. This has resulted in an
effective interest rate of approximately 20% and 29% on the Line of Credit at
June 30, 1999 and 1998, respectively. The Line of Credit included an unamortized
debt discount of $108,000 at June 30, 1998 which was fully amortized in fiscal
1999..
On February 22, 1999, the same two significant stockholders of the Company
agreed to provide interim financing to the Company in the amount of up to
$150,000 of which $135,000 was borrowed at June 30, 1999 and the balance
subsequent to year end. In consideration for the interim financing, the Company
F-18
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Notes Payable (continued)
agreed that in the event that the Company was unable to obtain additional
financing of at least $1,500,000 by April 1, 1999, the lenders had the right to,
in exchange for their right to repayment of the interim financing, convert any
outstanding principal amount plus interest, into either (i) shares of Common
Stock of the Company at the then fair market value of the Common Stock or (ii)
shares of APT equal to 10% of the issued and outstanding shares of the Common
Stock of APT. The lendors also agreed to subordinate their notes to February 23,
1999 and June 26, 1999 notes totaling $225,000 discussed below. In further
consideration for the interim financing, the Company agreed to amend the Credit
Agreement in order to allow the lenders to have the option to exchange their
full right to payment for 90% of the issued and outstanding shares of APT.
During the period from September 1998 to February 1999, the acting President and
Chief Executive Officer of the Company, provided loans to the Company or did not
receive accrued compensation aggregating $190,000, which loans are represented
by a promissary note dated February 23, 1999. The loans accrue interest at the
rate of 12% per year and are due upon demand but in no event later than
September 1, 1999.
At June 30, 1999 and 1998 the amounts borrowed under the Credit Agreement and
the interim financing and $103,085 of the promissory note dated February 23,
1999 which were converted subsequent to June 30, 1999 into Series B Convertible
Preferred Stock have been classified as long term debt(see Notes 4 and 11).
On June 26, 1999, a director of the Company, loaned the Company $35,000 which
accrues interest at the rate of 12% per year and is due upon demand but not
later than September 1, 1999.
5. Restricted Assets
Dunkirk had a debt service reserve fund equivalent to 10% of the solid waste
disposal facility bonds plus interest which was required to be deposited in
escrow. In September 1997, the balance of the debt service reserve fund of
approximately $424,000 was used to retire the bonds (see Note 2), including
$230,000 of accrued interest on the bonds.
Dunkirk also had an additional debt service reserve fund deposited in escrow as
required by the ESDC. In December 1997, the balance of the debt service reserve
fund of approximately $459,000 was applied against the outstanding principal and
accrued interest due on the related debt (see Note 2).
F-19
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Commitments and Contingencies
Litigation
July 1999 an insurance company filed a complaint for premiums alleged to be
owing under certain insurance policies for approximately $56,000 and the Company
has filed a motion to dismiss the action.
In addition to the above matters and in the normal course of conducting its
business, the Company is involved in various other litigation. The Company is
not a party to any litigation or governmental proceeding which its management
believes could result in any judgments or fines against it that would have a
material adverse affect on the Company's financial position, liquidity or
results of operations.
Lease Agreements
The Company has entered into capital leases for machinery and equipment that may
be purchased on expiration of the leases on various dates through 2000. The net
asset value of property under capitalized leases, included in property, plant
and equipment, is as follows:
June 30,
1999 1998
---- ----
Machinery and equipment $353,545 $353,545
Less accumulated amortization 344,394 321,039
-------- --------
$ 9,151 $ 32,506
======== ========
Lease amortization of $23,355 and $31,714 for the years ended June 30, 1999 and
1998, respectively, is included in cost of goods sold.
Future minimum lease payments required under operating leases together with the
present value of the net minimum lease payments for capitalized leases as of
June 30, 1999 are as follows:
Capitalized Operating
Leases Leases
------ ------
June 30,
2000 $ 14,986 $125,349
2001 -- 4,011
2002 -- 1,337
---------------------
Total net minimum lease payments 14,986 $130,697
========
Less amount representing interest 298
--------
Present value of net minimum lease payments $ 14,688
========
Total rent expense of the Company for the periods ended June 30, 1999 and 1998
was $206,995 and $238,372, respectively.
F-20
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Consulting Agreement
The Company entered into a Consulting Agreement with the Acting President to
assist the Company in strategic planning, business development, investor
relations, fund raising and such other activities as shall be reasonably
requested by the Board. Fees will accrue under the Agreement at $10,000 per
month until its expiration in August 2000.
7. Capital Stock
In connection with the Company's May 16, 1996 initial public offering, 740,559
shares of the Company's Common Stock and options to purchase 71,923 shares of
Common Stock (the "Escrow Securities") were deposited into escrow by the holders
thereof. The Escrow Securities will only be released from escrow when the
Company attains certain earnings levels or the market price of the Company's
Common Stock achieves certain levels. These Escrow Securities are subject to
cancellation if such conditions are not achieved by June 30, 2000. In the event
that the Escrow Securities are released from escrow to the stockholders of the
Company who are officers, directors, employees or consultants of the Company,
compensation expense will be recorded for financial reporting purposes. This
non-cash charge to earnings will be equal to the fair value of such securities
on the date of their release.
In August, September and December of 1997, the Company sold 553,000 shares of
Series A Preferred Stock, with a par value of $.001 per share and a stated value
of $10 per share, under a placement agency agreement for the private placement
of the Series A Preferred Stock. The net proceeds to the Company were $4,523,302
after deducting the placement agent commissions and expenses and other
transaction expenses. Each share of Series A Preferred Stock is convertible into
twenty shares of common stock at a conversion price of $0.50 per share after
giving effect to anti-dilution adjustments resulting from the reset of the
conversion price of the Series A Preferred Stock on December 8, 1998. Commencing
in December 1998, the holders of the Series A Preferred Stock are entitled to
receive dividends payable in cash, or at the option of the Company, in
additional shares of Series A Preferred Stock at the rate of 10% per annum. The
affirmative vote of the holders of at least two-thirds of the Series A Preferred
Stock is required for the issuance of senior securities, the incurrence of
indebtedness, the repurchase of securities and certain other restrictions. The
placement agent received a cash commission of 9% and a non-accountable expense
allowance of 4% of the gross proceeds. The placement agent also received
warrants, which expire in June, 2008, to purchase 61,945 shares of the Company's
Series A Preferred Stock at an exercise price of $9.82 per share (after giving
effect to antidilution adjustments resulting from the issuance of the additional
shares of Series A Preferred Stock on April 10,1998).
The Series A Preferred Stock is convertible at a discount on various dates
beginning April 10, 1998 through January 10, 1999. As a result, a Series A
Preferred Stock dividend of $757,997 ($.11per Common Share) has been recorded
for year ended June 30, 1999 and a dividend of $2,605,503 ($.54 per Common
share) has been recorded for year ended June 30, 1998 for the difference between
the discounted conversion price of the Series A Preferred Stock and the fair
market value of the Company's Common Stock at the time of issuance. The Series A
Preferred Stock also contains a reset provision under which the conversion price
in effect immediately prior to the date that is 12 months after the final
closing date of the issuance and sale of the Series A Preferred Stock (the
"Reset Date") shall be adjusted and reset effective as of the Reset Date if the
average closing bid price of the Common Stock for the twenty (20) consecutive
trading days
F-21
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Capital Stock (continued)
immediately preceding the Reset Date is less than 135% of the then applicable
conversion price (a "Reset Event"). Upon the occurrence of a Reset Event, the
conversion price shall be reduced to be equal to the greater of (A) the 12-month
trading price divided by 1.35, or (B) 50% of the then applicable conversion
price. As a result of this reset feature, a Series A Preferred Stock dividend of
$118,200 ($.02 per Common Share) has been recorded for the year ended June 30,
1999 and a dividend of $426,816 ($.09 per Common share) has been recorded for
the year ended June 30, 1998 for the difference between the discounted
conversion price as reset and the fair market value of the Company's Common
Stock at the time of issuance. This reset feature resulted in the conversion
price of the Series A Preferred Stock being adjusted to $0.50 per share of
Common Stock on December 8, 1998.
Pursuant to the terms of the private placement agreement, the Company was
required to register the shares of Common Stock underlying the Series A
Preferred Stock within 90 days of the final closing of the private placement.
Those shares of Common Stock were not registered within 90 days of the final
closing, and accordingly, the Company issued an additional 66,360 shares of
Series A Preferred Stock (convertible into 1,327,200 shares of Common Stock) to
the purchasers of the private placement on April 10, 1998. These shares were
valued at $663,600 (the fair value of the Series A Preferred Stock) and were
recorded in selling, general and administrative expenses in fiscal 1998. As of
June 30, 1999, the holders of the Series A Preferred Stock had converted 73,530
shares of Series A Preferred Stock into 1,407,300 shares of Common Stock.
At June 30, 1999, the Company had the following Common Stock purchase warrants
outstanding after giving effect to anti dilution provisions of the warrant
agreements and adjusted as a result of the reset of the conversion price of the
Series A Preferred Stock described above:
<TABLE>
<CAPTION>
Number of
Underlying Shares Exercise Price Expiration Date
<S> <C> <C> <C>
Class A Warrants 9,200,462 $2.95 May 16 & June 7, 2001
Class B Warrants 7,008,058 $3.93 May 16 & June 7, 2001
Lenders' Warrants 198,863 $0.66 July 21, 2002
(see Note 4)
Lenders' Warrants 385,075 $0.67 May 8, 2003
(see Note 4)
Others 319,204 $4.40-$5.28 May 5, 2000-May 5, 2005
----------
17,111,662
==========
</TABLE>
At June 30, 1999, all of the warrants were exercisable. Upon exercise of the
Class A Warrants, the purchaser receives one share of Common Stock and one new
Class B Warrant.
In addition to the warrants listed above and in connection with the initial
public offering, the Company sold for a nominal fee on May 16, 1996 to the
Underwriter the option to purchase up to 306,700 shares of Common Stock at an
exercise price of $6.16 and/or 608,204 Class A Warrants at an exercise price of
$.07
F-22
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Capital Stock (continued)
and/or 609,229 Class B Warrants at an exercise price of $.07, all of which
expire on May 16, 2001. After purchase the Class A Warrants will be exercisable
at a price of $2.95 per share of Common Stock and the Class B Warrants will be
exercisable at a price of $3.93 per share of Common Stock, subject to adjustment
to protect against dilution.
The Company maintains an Employee Stock Option Plan (the "Employee Plan") and a
Non-Employee Director Stock Option Plan (the "Non-Employee Plan"). Stock options
may be granted at the discretion of the Board of Directors. The Company has
reserved 440,000 and 250,000 shares of its Common Stock for issuance upon the
exercise of options granted under the Employee and Non-Employee Plans,
respectively. The Non-Employee Plan options are generally exercisable in full
one year after the date of grant and expire ten years from the date of grant.
The Employee Plan options primarily vest one-third on each of the first three
anniversaries of the date of grant and expire on the seventh anniversary of the
date of grant. The Company grants stock options at exercise prices equal to or
greater than the fair market value of the Company's Common Stock on the date of
grant. On January 27, 1998, the Company reduced the exercise price of certain
options granted under the Non-Employee Plan for 21,580 shares to $0.78 per share
from exercise prices ranging from $3.125 to $5.00 per share.
The following table summarizes the activity in options under the Employee and
Non-Employee Plans:
Weighted Average
Number of Shares Exercise Price
Employee Plan Options
Outstanding at July 1, 1997 169,080 4.40
Granted at market value 272,500 .78
Granted below market value 20,000 1.38
Canceled (41,946) 4.40
-------
Outstanding at June 30, 1998 419,634 1.91
Granted above market value 25,000 .03
Canceled (184,435) 1.90
-------
Outstanding at June 30, 1999 260,199 1.73
=======
Non-Employee Plan Options
Outstanding at July 1, 1997 58,330 3.32
Granted at market value 135,000 .94
Canceled (25,412) 3.41
-------
Outstanding at June 30, 1998
and June 30, 1999 167,918 1.08
=======
F-23
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Capital Stock (continued)
Options Outstanding Options Exercisable
at June 30, 1999 at June 30, 1999
----------------------------------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Number Exercise Contractual Number Exercise
Range of Shares Price Life (Years) of Shares Price
--------------------------------------------------------------------------
$0.03-$0.781 306,580 $0.720 7.1 159,912 $0.664
$1.375-$1.875 40,000 $1.625 6.6 40,000 $1.625
$3.125-$5.00 81,537 $4.245 4.1 74,034 $4.229
------- -------
TOTAL 428,117 $1.476 6.5 273,946 $1.767
======= =======
Of the total options outstanding under the plans, 273,946 and 198,123 were
exercisable at June 30, 1999 and 1998, respectively.
Effective as of August 26, 1996 ("Effective Date"), the Company approved and
adopted the 1996 Long- Term Employee Incentive Plan (the "Plan"). Under the
Plan, payment of awards may be in cash or the Common Stock of the Company or a
combination of both, at the option of the Company. The maximum number of shares
of the Company's Common Stock available for awards under the Plan is 800,000,
subject to adjustments as provided in the Plan. The Plan will terminate without
further action of the board of directors on the tenth anniversary of the
Effective Date. In October 1996, the Company issued a total of 90,000 shares (at
par value and, accordingly, compensation expense was recognized) to two former
officers of the Company under the Plan which shares vested on January 1, 1998.
Effective in July 1997, the Company issued a total of 600,000 options at an
exercise price of $1.375 to two officers of the Company which vest 20% at date
of grant and 20% for each of the next four years. On January 27, 1998, the
Company reduced the exercise price of these options to $0.78 and granted a total
of 10,000 options at an exercise price of $0.78 to two other officers of the
Company which vest one-third on each of the first three anniversaries of the
date of grant. In October 1998, options for a total of 305,000 shares were
canceled upon the resignation of two officers of the Company. All options
granted under the Plan expire on the seventh anniversary of the dates of grant.
On January 27, 1998, the Company granted non-qualified options to purchase
15,000 shares of its Common Stock at an exercise price of $0.78 per share to a
former director which were vested at the date of grant and expire on the tenth
anniversary of the date of grant. These options are not part of the Employee
Plan, Non- Employee Plan or the 1996 Long-Term Employee Incentive Plan.
The Company recorded $265,150 in compensation costs during fiscal 1998 in
connection with the issuance of non-employee plan options, employee plan options
issued below market and the
F-24
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Capital Stock (continued)
modification of option terms, $207,000 and 57,246 of this amount is included in
unearned stock compensation at June 30, 1998 and 1999..
At June 30, 1999, the Company has reserved 1,414,392 shares of Common Stock for
the exercise of all options granted.
The Company's Board of Directors authorized an increase of the authorized number
of common shares to 50 million shares, which was approved by the Company's
stockholders at the Company's Annual Meeting held on March 31, 1998.
The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees",
and related interpretations in accounting for options issued to employees.
Accordingly, no compensation cost has been recognized for options granted to
employees at exercise prices, which equal or exceed the market price of the
Company's Common Stock at the date of grant. Options granted at exercise prices
below market prices are recognized as compensation cost measured as the
difference between market price and exercise price at the date of grant.
Statement of Financial Accounting Standards No. 123 (FAS 123), "Accounting for
Stock-Based Compensation", requires the Company to provide pro forma information
regarding net income and earnings per share as if compensation cost for the
Company's employee stock options had been determined in accordance with the fair
market value based on the method prescribed in FAS 123. The Company estimates
the fair value of each stock option at the date of grant by using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: no dividend yield, an expected life of 7.0 years for fiscal 1998
and 10.0 years for fiscal 1999, expected volatility of 55% for fiscal 1998 and
411% for fiscal 1999, and a risk- free interest rate of 6% for fiscal 1998 and
5.4% for fiscal 1999.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee and non-employee director stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
and non-employee director options.
For purposes of pro forma disclosures, the estimated fair value of the options
granted 1999 and 1998 is amortized to expense over the options' vesting period.
The weighted-average fair value of options granted during fiscal years 1999 and
1998 were $0.00 and $0.85, respectively. The Company's pro forma information
follows:
F-25
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Capital Stock (continued)
1999 1998
--------------------------------
Pro Forma net loss $ (3,238,652) $ (5,640,041)
Pro Forma loss per common share $ (0.63) $ (1.17)
8. Income Taxes
There was no income tax expense/benefit for the Company for the years ended June
30, 1999 and 1998.
Following is a reconciliation of the expected income tax benefit to the amount
based on the U.S. statutory rate of 34% for the years ended June 30, 1999 and
1998:
<TABLE>
<CAPTION>
For the year ended June 30,
1999 1998
---- ----
<S> <C> <C>
Income tax benefit based on U.S. statutory rate $(854,392) $(890,712)
Current year addition to the valuation allowance 854,392 890,712
------------------------
Provision for income taxes $ -- $ --
========================
</TABLE>
The significant components of the Company's deferred tax assets and liabilities
are as follows:
June 30,
1999 1998
------------------------------
Deferred tax assets:
Reserve for disposal $ 120,400 $ 206,000
Start-up costs 8,977 87,661
Property, plant and equipment 1,816,613 2,400,544
Allowance for doubtful accounts 27,258 7,200
Accruals 177,180 166,620
Stock options and warrants 120,476 57,500
Net operating loss carryforward 9,821,435 8312,424
------------------------------
Total deferred tax assets 12,092,339 11,237,949
Valuation allowances (12,092,339) (11,237,949)
------------------------------
Net deferred tax assets $ -- $ --
==============================
F-26
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Income Taxes (continued)
The Company's valuation allowance increased by approximately $854,000 for the
year ended June 30,1999 which represents the effect of changes to the temporary
differences and net operating losses. The Company has recorded a valuation
allowance to state its deferred tax assets at estimated net realizable value due
to the uncertainty related to realization of these assets through future taxable
income.
At June 30,1999, the Company has approximately $24 million of net operating loss
carry forwards, which expire between 2006 and 2019. The Tax Reform Act of 1986
enacted a complex set of rules (Section 382) limiting the potential utilization
of net operating loss carry forwards in periods following a corporate "ownership
change". In general, an ownership change is deemed to occur if the percentage of
stock of a loss corporation owned (actually, constructively and, in some cases,
deemed) by one or more "5% stockholders" has increased by more than 50
percentage points over the lowest percentage of such stock owned during a three
year testing period. Although a comprehensive evaluation has not yet been
performed, it is likely that due to prior shifts in ownership (the Dunkirk
merger and the completion of the IPO) and current shifts in ownership (the
Series A Preferred Stock Offering), the Company's ability to utilize its net
operating loss carry forwards could be severely limited.
9. Employee Benefit Plan
The Company established a 401(K) defined contribution plan covering
substantially all employees meeting certain minimum age and service requirements
effective August 1, 1998. The Company's contribution to the plan is determined
by the Board of Directors and is limited to a maximum of 100% of the employee's
contribution and 6% of the Employee's compensation. Contributions made to the
plan for the fiscal year ended June 30, 1999 were $18,913, no contributions were
made for the fiscal year ended June 30, 1998
10. Industry Segments
The Company's operations are classified into two business segments; decorative
particles and performance aggregates ("particles") and industrial abrasives and
recycling cathode ray tube glass ("abrasives and CRT").
The particle segment manufacturers, processes and markets decorate particles
that visually enhance structural materials such as plasters, tiles, grouts, wall
systems and roofing and flooring and performance aggregates which can be used as
structural and textural enhancers, fillers and additives, and to strengthen and
add consistency to materials such as cements, plasters, grouts, roofing and
flooring, and glass and ceramic materials.
The abrasives and CRT segment manufactures, processes and markets industrial
abrasives which can be used for surface cleaning and preparation applications
such as in cleaning steel structures, railcars, aircraft parts, and equipment.
During the two years ended June 30, 1999, the Company continued to shift its
focus away from industrial abrasives in favor of decorative particles and
performance aggregates due to the increased costs of production for industrial
abrasives relative to their market sales price. The Company was also engaged in
recycling CRT glass produced in the manufacture of televisions for resale to
television manufacturers and others. In March 1998 the Company agreed to
subcontract its recycling operations which has resulted in a decrease in CRT
revenues in calendar 1998 and no revenue in 1999.
F-27
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows revenues and operating income (loss) and other
financial information by segment as of and for the years ended June 30, 1999 and
1998:
1999 1998
----------------------------
Revenue
Particles $ 916,441 $ 286,265
Abrasives and CRT 203,041 1,611,715
----------------------------
$ 1,119,482 $ 1,897,980
============================
Operating Income (Loss)
Particles $ (574,803) $ (733,650)
Abrasives and CRT 30,618 (5,363,986)
Corporate Expenses (1,093,336) (2,344,709)
----------------------------
$(1,637,521) $(8,442,345)
============================
Depreciation and Amortization
Particles $ 129,805 $ 99,454
Abrasives and CRT 22,199 750,149
Corporate Expenses 11,986 7,868
----------------------------
$ 163,990 $ 857,471
============================
Interest Income
Particles $ -- $ --
Abrasives and CRT 939 39,578
Corporate Expenses 2,611 42,738
----------------------------
$ 3,550 $ 82,316
============================
F-28
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
Interest Expense
Particles $ 772 $ --
Abrasives and CRT 207,998 436,600
Corporate 268,249 115,700
-------------------------
$ 477,019 $ 552,300
=========================
Write Down of Property Plant & Equipment Held for Sale
Particles $ -- $ --
Abrasives and CRT -- 4,913,422
Corporate -- --
-------------------------
$ -- $4,913,422
=========================
Extraordinary Item - Gain on Debt Retirement
Particles $ -- $ --
Abrasives and CRT -- 6,133,385
Corporate -- 291,619
-------------------------
$ -- $6,425,004
=========================
Identifiable Assets
Particles $ 911,812 $ 909,618
Abrasives and CRT 1,144,203 1,646,888
Corporate 157,629 118,965
-------------------------
$2,213,644 $2,675,471
=========================
Capital Expenditures
Particles $ 76,227 $ 250,687
Abrasives and CRT 4,269 41,863
Corporate 6,825 80,022
-------------------------
$ 87,321 $ 372,572
=========================
</TABLE>
F-29
<PAGE>
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Subsequent Events
In September 1999, the Company sold in a private placement 4,802,967 shares of
Series B Convertible Preferred Stock with a par value of $.001 per share and a
stated value of $0.60 per share. Each share of Series B Convertible Preferred
Stock is convertible into twenty shares of Common Stock at a conversion price of
$0.03 per share. Commencing twelve months from the closing of the private
placement, the holders of the Series B Convertible Preferred Stock are entitled
to receive dividends payable in cash or in Series B Convertible Preferred Stock
at the option of the Company, at the rate of 10% per annum.
The Company accepted cash and the cancellation of debt as consideration for the
sale of the Series B Convertible Preferred Stock. Of the total proceeds,
$1,115,000 was in cash and $1,766,778 was in the form of cancellation of debt
and accrued interest. Of the debt converted, $1,652,778 was from the two
significant stockholders of the Company who converted all of the debt and
accrued interest owed to them under the Credit Agreement and interim financing
agreement. Also the Acting President and Chief Executive Officer converted
$114,000 of the debt and accrued interest owed to him under the promissory note
dated February 23, 1999. (See Notes 3 and 4)
The two significant stockholders have agreed to give the Company an option to
repurchase their shares of Series B Convertible Preferred Stock at a rate per
share of the equivalent Common Stock of $0.03 per share during the first year
from the date of closing of the private placement, $0.04 per share during the
second year from such date and $0.05 per share during the third year from such
date
From the cash proceeds of the private placement, $600,000 was paid to Empire
State Development Corporation in full satisfaction of the Dunkirk - Term loan
with the New York State Job Development Authority with a $1,183,110 principal
balance and the Dunkirk - New York Job Development Authority (Al Tech)
subordinated note with a principal balance of $37,870. In addition $160,000 was
paid to the Company's former legal counsel in settlement of an accrued liability
of $197,689 for past due professional services. The forgiveness of debt will be
reflected as an extraordinary gain in the Company's fiscal 2000 first quarter
results
On September 24, 1999, the Company's Certificate of Incorporation was amended to
increase the number of shares of Common Stock it is authorized to issue from 50
million to 200 million.
F-30
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------ ----------------------
2.1* Agreement and Plan of Reorganization dated August 16, 1994,
among the Company, CTI Acquisition Corporation, Dunkirk
International Glass and Ceramics Corporation ("Dunkirk") and
certain stockholders of Dunkirk listed on the signature pages
thereto
3.1* Amended and Restated Certificate of Incorporation of the
Company
3.2** Certificate of Designation of Series A Convertible Preferred
Stock
3.2.1 Certificate of Designation of Series B Convertible Preferred
Stock
3.3* By-laws of the Company
3.4**** Certificate of Amendment to the Restated Certificate of
Incorporation of the Company
3.5 Certificate of Merger of CTI Subsidiary Corp. With and Into
the Company and Agreement and Plan of Merger between the
Company and CTI Subsidiary Corp..
4.3* Term Note No. 2 dated as of January 27, 1995, between Key
Bank of New York and Dunkirk
4.4* Security Agreement dated as of January 27, 1995, between Key
Bank of New York and Dunkirk
10.1* Conversion Technologies International, Inc. 1994 Employee
Stock Option Plan, As Amended
10.2* Conversion Technologies International, Inc. 1994 Stock Option
Plan for Non-Employee Directors, As Amended
10.3** Conversion Technologies International, Inc. 1996 Long-Term
Employee Incentive Plan, As Amended
10.4** Consulting Agreement dated March 1, 1995 between the Company
and Eckardt C. Beck, As Amended
10.5** Employment Agreement dated as of August 1, 1997 between the
Company and William L. Amt.
10.18* Project Development Assistance Agreement dated July 13, 1995,
among the Company, Technology Funding Partners III, L.P. and
Technology Funding Venture Partners V, An Aggressive Growth
Fund, L.P.
10.19** Technology Purchase Agreement dated as of June 30, 1997
between Advanced Particle Technologies, Inc. and Vangkoe
Industries, Inc.
10.20** Distributor Agreement dated as of June 30, 1997 between
Advanced Particle Technologies, Inc. and Vangkoe Industries,
Inc.
10.21* Consulting Agreement dated as of May 5, 1995, among the
Company, Technology Funding Partners III, L.P. and Technology
Funding Venture Partners V, An Aggressive Growth Fund, L.P.
10.22* Registration Rights Agreement dated as of May 5, 1995, among
the Company, Technology Funding Partners III, L.P. and
Technology Funding Venture Partners V, An Aggressive Growth
Fund, L.P.
<PAGE>
10.25** Warrant for the Purchase of Shares of Series A Convertible
Preferred Stock issued to Paramount Capital, Inc. by the
Company
10.26* Series A Preferred Stock Purchase Agreement dated as of May 5,
1995, among the Company, Technology Funding Partners 111, L.P.
and Technology Funding Venture Partners V, An Aggressive
Growth Fund, L.P.
10.27** Form of Placement Agency Agreement between the Company and
Placement Agent.
10.28** Form of Subscription Agreement between the Company and various
subscribers of Series A Preferred Stock.
10.29** Form of Placement Agent Warrant.
10.30** Form of Financial Advisory Services Agreement between the
Company and Placement Agent.
10.31** Form of Warrant issued in connection with Senior Secured Line
of Credit Agreement.
10.32** Letter from Empire State Development Corporation ("ESDC") to
Dunkirk dated July 22, 1997 confirming its guarantee of the
Key Bank Note
10.33** Letter from Key Bank to ESDC dated July 30, 1997 confirming
that it will not exercise any remedies under the Key Bank Note
and will execute documents to assign the Key Bank Note to ESDC
10.34*** Senior Secured Line of Credit Agreement dated as of May 8,
1998 by and among Aries Domestic Fund, L.P., The Aries Fund,
Dunkirk, APT and the Company
10.34.1 Form of Senior Secured Notes issued to The Aries Master Fund
aggregating $910,000 in principal amount.
10.34.2 Form of Senior Secured Notes issued to the Aries Domestic
fund, L.P. aggregating $380,000 in principal amount.
10.35**** Security Agreement dated as of May 8, 1998 among the Company,
Dunkirk, APT and Paramount Capital Asset Management, Inc.
10.36**** Subsidiary Guarantee dated as of May 8, 1998 by Dunkirk and
APT in favor of The Aries Fund and Aries Domestic Fund, L.P.
10.37**** Promissory Note dated as of February 23, 1999 issued by the
Company in favor of Eckardt C. Beck
10.38**** Termination Agreement dated as of January 1, 1998 by and
between the Company and Jack D. Hays, Jr.
10.39**** Termination Agreement dated as of January 1, 1998 by and
between the Company and Richard H. Hughes
10.40**** Consulting Agreement dated December 22, 1998 by and between
the Company and 4C Technologies, Inc.
10.41**** Amendment dated as of May 8, 1998 to the Technology Purchase
Agreement dated as of June 30, 1997 by and between APT and
VANGKOE
10.42**** Termination Agreement dated as of May 8, 1998 by and between
APT and VANGKOE
<PAGE>
10.43**** Materials Bill of Sale Agreement dated as of May 8, 1998 by
and between the Company and VANGKOE
10.44**** Ceramaglass Trademark & Intellectual Property Agreement dated
as of May 8, 1998 by and between the Company and VANGKOE
10.45**** Ceramaquartz Trademark & Intellectual Property Agreement dated
As of May 8, 1998 by and between the Company and VANGKOE
10.46**** Letter Agreement of the Company dated March 11, 1998 with
Dlubak
10.47**** Lease dated April 1, 1998 by and between 312 Industrial Park
and the Company
10.48**** Lease dated April 1, 1998 by and between Willard Park Inc. and
the Company
10.49**** Manufacturer Representative Agreement dated as of January 1,
1998 by and between the Company and Engineered Products Sales
Associates
10.50**** Manufacturer Representative Termination Agreement dated as of
January 1, 1998 by and between the Company and Engineered
Products Sales Associates
10.51 Form of Subscription Agreement between the Company and various
Subscribers of the Series B Convertible Preferred Stock.
10.52.1 Form of Convertible Promissory Note issued by the Company in
favor of The Aries Master Fund aggregating $109,500 in
principal amount.
10.52.2 Form of Convertible Promissory Note issued by the Company in
favor of the Aries Domestic Fund, L.P. aggregating $60,500 in
principal amount.
10.53 Lease dated September 17, 1999 by and between Dunkirk
International Glass & Ceramics Corp. And Red Wing Company,
Inc..
11 Statement of Computation of Net Loss Per Share
21** Subsidiaries of the Company
27 Financial Data Schedule for the year ended June 30, 1999
* Incorporated by reference to the exhibits to the Company's
Registration Statement on form SB-2, Registration No.
333-00756.
** Incorporated by reference to the exhibits to the Company's
Annual Report on form 10-KSB, fiscal 1997.
*** Incorporated by reference to the exhibits to the Company's
Annual Report on form 10-QSB for the quarterly period ended
March 31, 1998.
**** Incorporated by reference to the exhibits to the Company's
Annual Report on form 10-KSB, fiscal 1998.
All other Exhibits filed herewith.
CERTIFICATE OF DESIGNATION
OF
SERIES B CONVERTIBLE PREFERRED STOCK
OF
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
CONVERSION TECHNOLOGIES INTERNATIONAL, INC., a corporation organized and
existing under the laws of the State of Delaware (the "Corporation"), does
hereby certify that, pursuant to the authority conferred on the Board of
Directors of the Corporation by the Amended and Restated Certificate of
Incorporation, as amended to date (the "Certificate of Incorporation"), of the
Corporation and in accordance with Section 151 of the General Corporation Law of
the Stale of Delaware, the Board of Directors of the Corporation adopted the
following resolution establishing a series of 5,000,000 shares of Preferred
Stock of the Corporation designated as "Series B Convertible Preferred Stock":
RESOLVED, that pursuant to the authority conferred on the Board of
Directors of this Corporation by the Certificate of Incorporation, a
series of Preferred Stock, par value $.00l per share, of the Corporation
is hereby established and created, and that the designation and number of
shares thereof and the voting and other powers, preferences and relative,
participating, optional or other rights of the shares of such series and
the qualifications, limitations and restrictions thereof are as follows:
Series B Convertible Preferred Stock
1. Designation and Amount, and Definitions.
(a) There shall be a series of Preferred Stock designated as "Series B
Convertible Preferred Stock" and the number of shares constituting such series
shall be 5,000,000, subject to adjustment as provided herein. Such series is
referred to herein as the "Series B Preferred Stock". Such number of shares may
be increased prior to the Final Closing Date (as defined below) or decreased by
resolution of the Board of Directors of the Corporation; provided however, that
no decrease shall reduce the number of shares of Series B Preferred Stock to
fewer than the number of shares then issued and outstanding.
(b) As used in this Certificate of Designation, the following terms shall
have the following meanings, unless thc context otherwise requires:
(i) "Market Price shall mean the average Closing Bid Price (as
defined below), for the thirty (30) consecutive trading days (as
defined below), ending
<PAGE>
with the trading day prior to the date as of which the Market Price
is being determined, provided that if the prices referred to in the
definition of Closing Bid Price cannot be determined for such
period, "Market Price" shall mean Fair Market Value (as defined
below).
(ii) "Fair Market Value" of any asset (including any security) means
the fair market value thereof as mutually determined by the
Corporation and the holders of a majority of the Series B Preferred
Stock then outstanding.
(iii) "Stock Market" shall mean, with respect to any security, the
principal national securities exchange on which such security is
listed or admitted to trading or, if such security is not listed or
admitted to trading on any national securities exchange, The Nasdaq
National Market System or The Nasdaq SmallCap Market (collectively,
"Nasdaq") or, if such security is not quoted on Nasdaq, the OTC
Bulletin Board or, if such security is not quoted an the OTC
Bulletin Board, the over-the-counter market as furnished by any NASD
member firm selected from time to time by the Corporation for that
purpose.
(iv) The "Closing Bid Price" of any security, for each trading day,
shall mean the price at which such security was last exchanged on
the Stock Market during such trading day or, if there were no
transactions on such trading day, the average of the reported
closing bid and asked prices, regular way, of such security on the
Stock Market on such trading day.
(v) A "trading day" shall mean a day on which the Stock Market is
open for the transaction of business.
2. Dividends and Distributions.
(a) Commencing on the Final Closing Date (as defined below), the holders
of the Series B Preferred Stock shall be entitled to receive cumulative
dividends on each share of Series B Preferred Stock, payable in cash, or at the
option of the Company, in kind, at the rate of 10% per annum (computed on the
basis of a 360-day year of twelve 30 day months) of the Dividend Base Amount (as
defined below), payable semi-annually in arrears. If the Company elects to pay
in kind, such dividends shall be paid in additional duly authorized, fully paid
and non assessable shares of Series B Preferred Stock. Such dividends shall
accrue and accumulate whether or not they have been declared and whether or not
there are profits, surplus or other funds of the Corporation legally available
for the payment of dividends. The "Dividend Base Amount" shall be $0.60 (subject
to appropriate adjustment to reflect any stock split, combination,
reclassification or reorganization of the Series B Preferred Stock).
(b) In addition to the foregoing, subject to the prior and superior rights
of the holders of any shares of any series or class of capital stock ranking
prior and superior to the shares of Series B Preferred Stock with respect to
dividends, the holders of shares of Series B Preferred Stock shall be entitled
to receive, as, when and if declared by the Board of Directors of the
Corporation, out of assets legally available for that purpose, dividends or
distributions in cash. stock or otherwise.
2
<PAGE>
(c) The Corporation shall not declare any dividend or distribution on any
Junior Stock (as defined below), unless the Corporation shall have paid all
accrued cumulative dividends on the Series B Preferred Stock pursuant to
Subsection 2(a), if any, and shall, concurrently with the declaration of such
dividend or distribution on the Junior Stock, declare a like dividend or
distribution, as the case may be, on the Series B Preferred Stock in an amount
per share equal to (x) the amount of the dividend or distribution per share of
the Company's common stock, $.00025 par value per share (the "Common Stock"),
multiplied by (y) the effective Conversion Rate at the time of such dividend or
distribution.
(d) Any dividend or distribution (other than that referenced in Subsection
2(a)) payable to the holders of the Series B Preferred Stock pursuant to this
Section 2 shall be paid to such holders at the same time as the dividend or
distribution on the Junior Stock or any other capital stock of the Corporation
by which it is measured is paid.
(e) All dividends or distributions declared upon the Series B Preferred
Stock shall be declared pro rata per share.
(f) Any reference to "distribution" contained in this Section 2 shall not
be deemed to include any distribution made in connection with or in lieu of any
Liquidation Event (as defined be low).
(g) "Junior Stock" shall mean the Common Stock and any shares of preferred
stock of any series or class of the Corporation, whether presently outstanding
or hereafter issued, which are junior to the shares of Series B Preferred Stock
with respect to (i) the distribution of assets on any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation, (ii) dividends or
(iii) voting. Junior Stock shall not include the Company's Series A Convertible
Preferred Stock. The Company's Series Convertible A Preferred Stock (the `Series
A Preferred Stock") shall be deemed to be on parity with the shares of Series B
Preferred Stock with respect to (i) the distribution of assets on any voluntary
or involuntary liquidation, dissolution or winding up of the Corporation, (ii)
dividends and (iii) voting.
3. Liquidation Preference.
(a) In the event of a (i) liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, (ii) a sale or other disposition
of all or substantially all of the assets of the Corporation or (iii) any
consolidation, merger, combination, reorganization or other transaction in which
the Corporation is not the surviving entity or shares of Common Stock
constituting in excess of 50% of the voting power of the Corporation are
exchanged for or changed into stock or securities of another entity, cash and/or
any other property (a "Merger Transaction") (items (i), (ii) and (iii) of this
sentence being collectively referred to as a "Liquidation Event"), after payment
or provision for payment of debts and other liabilities of the Corporation, the
holders of the Series B Preferred Stock then outstanding shall be entitled to be
paid out of the assets of the Corporation available for distribution to its
stockholders, whether such assets are capital, surplus or earnings, before any
payment or declaration and setting apart for payment of any amount shall be made
in respect of any Junior Stock, an amount equal to $0.81 per share plus an
amount equal to all declared and/or accrued unpaid dividends thereon; provided,
however, in the case of a Merger Transaction, such amount per share may be paid
in
3
<PAGE>
cash, property (valued as provided in Subsection 3(b)) and/or securities (valued
as provided in Subsection 3(b)) of the entity surviving such Merger Transaction.
If upon any Liquidation Event, whether voluntary or involuntary, the assets to
be distributed to the holders of the Series B Preferred Stock shall be
insufficient to permit the payment to such stockholders of the full preferential
amounts aforesaid, then all of the assets of the Corporation to be distributed
shall be so distributed ratably to the holders of the Series B Preferred Stock
on the basis of the number of shares of Series B Preferred Stock held. A
consolidation or merger of the Corporation with or into another corporation,
other than in a transaction described in this Subsection 3(a) above, shall not
be considered a liquidation, dissolution or winding up of the Corporation or a
sale or other disposition of all or substantially all of the assets of the
Corporation and accordingly the Corporation shall make appropriate provision to
ensure that the terms of this Certificate of Designation survive any such
transaction. All shares of Series B Preferred Stock shall rank as to payment
upon the occurrence of any Liquidation Event senior to the Common Stock as
provided herein, on parity with the Series A Preferred Stock and, unless the
terms of such series shall provide otherwise, senior to all other series of the
Corporation's preferred stock.
(b) Any securities or other property to be delivered to the holders of the
Series B Preferred Stock pursuant to Subsection 3(a) hereof shall be valued as
follows:
(i) In the case of securities not subject to an investment letter or
other similar restriction on free marketability:
(A) If traded on the Stock Market, the value shall be deemed to be
the Market Price of such securities as of the third day prior
to the date of valuation.
(B) If not traded an the Stock Market, the value shall be the Fair
Market Value of such securities.
(ii) In the case of securities for which there is an active public
market but which are subject to an investment letter or other
restrictions on free marketability, the value shall be the Fair
Market Value thereof, determined by discounting appropriately the
Market Price thereof.
(iii) In the case of all other securities and property, the value
shall be the Fair Market Value thereof.
If the holders of a majority of the Series B Preferred Stock and the Corporation
are unable to reach agreement on any valuation matter, such valuation shall be
submitted to and determined by a nationally recognized independent investment
bank selected by the Board of Directors of the Corporation and the holders of a
majority of the Series B Preferred Stock then outstanding (or, if such selection
cannot be agreed upon promptly, or in any event within ten days, then such
valuation shall be made by a nationally recognized independent investment
banking firm selected by the American Arbitration Association in New York City
in accordance with its rules), the costs of which valuation shall be paid for by
the Corporation.
4. Conversion.
4
<PAGE>
(a) Right of Conversion. The shares of Series B Preferred Stock shall be
convertible, in whole or in part, at the option of the holder thereof and upon
notice to the Corporation as set forth in Subsection 4(b) below, into fully paid
and nonassessable shares of Common Stock and such other securities and property
as hereinafter provided. The initial conversion price per share of Common Stock
shall be $.03 (the "Conversion Price") and shall be subject to adjustment as
provided herein. The rate at which each share of Series B Preferred Stock is
convertible at any time into Common Stock (the "Conversion Rate") shall be
determined by dividing the then existing Conversion Price into $0.60.
(b) Conversion Procedures. Any holder of shares of Series B Preferred
Stock desiring to convert such shares into Common Stock shall surrender the
certificate or certificates evidencing such shares of Series B Preferred Stock
at the office of the transfer agent for the Series B Preferred Stock, which
certificate or certificates, if the Corporation shall so require, shall be duly
endorsed to the Corporation or in blank, or accompanied by proper instruments of
transfer to the Corporation or in blank, accompanied by irrevocable written
notice to the Corporation that the holder elects so to convert such shares of
Series B Preferred Stock and specifying the name or names (with address) in
which a certificate or certificates evidencing shares of Common Stock are to be
issued. The Corporation need not deem a notice of conversion to be received
unless the holder complies with all the provisions hereof. The Corporation will
instruct the transfer agent (which may be the Corporation) to make a notation of
the date that a notice of conversion is received, which date shall be deemed to
be the date of receipt for purposes hereof.
The Corporation shall, as soon as practicable after such deposit of
certificates evidencing shares of Series B Preferred Stock accompanied by the
written notice and compliance with any other conditions herein contained,
deliver at such office of such transfer agent to the person for whose account
such shares of Series B Preferred Stock were so surrendered, or to the nominee
or nominees of such person, certificates evidencing the number of full shares of
Common Stock to which such person shall be entitled as aforesaid, together with
a cash payment for adjustment of any fraction of a share as hereinafter
provided. Subject to the following provisions of this paragraph, such conversion
shall be deemed to have been made as of the date of such surrender of the shares
of Series B Preferred Stock to be converted, and the person or persons entitled
to receive the Common Stock deliverable upon conversion of such Series B
Preferred Stock shall be treated for all purposes as the record holder or
holders of such Common Stock on such date; provided, however, that the
Corporation shall not be required to convert any shares of Series B Preferred
Stock while the stock transfer books of the Corporation are closed for any
purpose, but the surrender of Series B Preferred Stock for conversion during any
period while such books are so closed shall become effective for conversion
immediately upon the reopening of such books as if the surrender had been made
on the date of such reopening, and the conversion shall be at the conversion
rate in effect on such date. No adjustments in respect of any dividends on
shares surrendered for conversion or any dividend on the Common Stock issued
upon conversion shall be made upon the conversion of any shares of Series B
Preferred Stock.
All notices of conversion shall be irrevocable; provided, however,
that if the Corporation has sent notice of an event pursuant to Subsection 4(g)
hereof, a holder of Series B Preferred Stock may, at its election, provide in
its notice of conversion that the conversion of its shares of Series B Preferred
Stock shall be contingent upon the occurrence of the record date or
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effectiveness of such event (as specified by such holder), provided that such
notice of conversion is received by the Corporation prior to such record date or
effective date, as the case may be.
(c) Adjustment of Conversion Rate and Conversion Price.
(i) Except as otherwise provided herein, in the event the
Corporation shall, at any time or from time to time after the
original issue date of the Series B Preferred Stock, (1) sell or
issue any shares of Common Stock for a consideration per share less
than either (i) the Conversion Price in effect on the date of such
sale or issuance or (ii) the Market Price of the Common Stack as of
the date of the sale or issuance, (2) issue any shares of Common
Stock as a stock dividend to the holders of Common Stock, or (3)
subdivide or combine the outstanding shares of Common Stock into a
greater or lesser number of shares (any such sale, issuance,
subdivision or combination being herein called a "Change of
Shares"), then, and thereafter upon each further Change of Shares,
the Conversion Price in effect immediately prior to such Change of
Shares shall be changed to a price (rounded to the nearest cent)
determined by multiplying the Conversion Price in effect immediately
prior thereto by a fraction, the numerator of which shall be the sum
of the number of shares of Common Stock outstanding immediately
prior to the sale or issuance of such additional shares or such
subdivision or combination and the number of shares of Common Stock
which the aggregate consideration, if any, received (determined as
provided in subsection 4(c)(v)(E) below) for the issuance of such
additional shares would purchase at the greater of (i) the
Conversion Price in effect on the date of such issuance or (ii) the
Market Price of the Common Stock as of such date, and the
denominator of which shall be the number of shares of Common Stock
outstanding immediately after the sale or issuance of such
additional shares or such subdivision or combination. Such
adjustment shall be made successively whenever such an issuance is
made.
(ii) In case of any reclassification, capital reorganization or
other change of outstanding shares of Common Stock, or in case of
any consolidation or merger of the Corporation with or into another
entity (other than a consolidation or merger in which the
Corporation is the continuing entity and which does not result in
any reclassification, capital reorganization or other change of
outstanding shares of Common Stock other than the number thereof),
or in case of any sale or conveyance to another entity of the
property of the Corporation as, or substantially as, an entirety
(other than a sale/leaseback, mortgage or other financing
transaction), the Corporation shall cause effective provision to be
made so that each holder of a share of Series B Preferred Stock
shall be entitled to receive, upon conversion of such share of
Series B Preferred Stock, the kind and number of shares of stock or
other securities or property (including cash) receivable upon such
reclassification, capital reorganization or other change,
consolidation, merger, sale or conveyance by a holder of the number
of shares of Common Stock into which such share of Series B
Preferred Stock was convertible immediately prior to such
reclassification, capital reorganization or other change,
consolidation, merger, sale or conveyance. Any such provision shall
include provision for adjustments that shall be as nearly equivalent
as may be practicable
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<PAGE>
to the adjustments provided for in this Subsection 4(c). The
Corporation shall not effect any such consolidation, merger or sale
unless prior to, or simultaneously with, the consummation thereof
the successor (if other than the Corporation) resulting from such
consolidation or merger or the entity purchasing assets or other
appropriate entity shall assume, by written instrument executed and
delivered to the transfer agent for the Series B Preferred Stock
(the "Transfer Agent"), the obligation to deliver to the holder of
each share of Series B Preferred Stock such shares of stock,
securities or assets as, in accordance with the foregoing
provisions, such holders may be entitled to receive and the other
obligations under this Agreement The foregoing provisions shall
similarly apply to successive reclassifications. capital
reorganizations and other changes of outstanding shares of Common
Stock and to successive consolidations, mergers, sales or
conveyances.
(iii) If, at any time or from time to time, the Corporation shall
issue or distribute to the holders of shares of Common Stock
evidence of its indebtedness, any other securities of the
Corporation or any cash, property or other assets (excluding an
issuance or distribution governed by one of the preceding
subsections of this Subsection 4(c) and also excluding cash
dividends or cash distributions paid out of net profits legally
available therefor in the full amount thereof (any such non-excluded
event being herein called a "Special Dividend")), then in each case
the holders of the Series B Preferred Stock shall be entitled to a
proportionate share of any such Special Dividend as though they were
the holders of the number of shares of Common Stock of the
Corporation into which their shares of Series B Preferred Stock are
convertible as of the record date fixed for the determination of the
holders of Common Stock of the Corporation entitled to receive such
Special Dividend.
(iv) After each adjustment of the Conversion Price pursuant to this
Subsection 4(c), the Corporation will promptly prepare a certificate
signed by the Chief Executive Officer or President, and by the
Treasurer or an Assistant Treasurer or the Secretary or an Assistant
Secretary, of the Corporation setting forth: (i) the Conversion
Price as so adjusted, (ii) the Conversion Rate corresponding to such
Conversion Price and (iii) a brief statement of the facts accounting
for such adjustment. The Corporation will promptly file such
certificate with the Transfer Agent and cause a brief summary
thereof to be sent by ordinary first class mail to each registered
holder of Series B Preferred Stock at his or her last address as it
shall appear on the registry books of the Transfer Agent. No failure
to mail such notice nor any defect therein or in the mailing thereof
shall affect the validity of such adjustment The affidavit of an
officer of the Transfer Agent or the Secretary or an Assistant
Secretary of the Corporation that such notice has been mailed shall,
in the absence of fraud, be prima facie evidence of the fed stated
therein. The Transfer Agent may rely on the information in thc
certificate as true and correct and has no duty or obligation to
independently verify the amounts or calculations set forth therein.
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<PAGE>
(v) For purposes of Paragraph 4(c)(i), the following provisions (A)
to (E) shall also be applicable:
(A) No adjustment of the Conversion Price shall be made unless
such adjustment would require an increase or decrease of at
least $.01 in such price; provided that any adjustments which
by reason of this Subparagraph 4(c)(v)(A) are not required to
be made shall be carried forward and shall be made at the time
of and together with the next subsequent adjustment which,
together with adjustments so carried forward, shall require an
increase or decrease of at least $.01 in the Conversion Price
then in effect hereunder.
(B) In case of (1) the sale by the Corporation (including as a
component of a unit) of any rights or warrants to subscribe
for or purchase, or any options for the purchase of, Common
Stock or any securities convertible into or exchangeable for
Common Stock (such securities convertible, exercisable or
exchangeable into Common Stock being herein called
"Convertible Securities"), or (2) the issuance by the
Corporation, without the receipt by the Corporation of any
consideration therefor, of any rights or warrants to subscribe
for or purchase, or any options for the purchase of, Common
Stock or Convertible Securities, whether or not such rights,
warrants or options, or the right to convert or exchange such
Convertible Securities, are immediately exercisable, and the
consideration per share for which Common Stock is issuable
upon the exercise of such rights, warrants or options or upon
the conversion or exchange of such Convertible Securities
(determined by dividing (x) the minimum aggregate
consideration, as set forth in the instrument relating thereto
(without regard to any antidilution or similar provisions
contained therein for a subsequent adjustment of such amount)
payable to the Corporation upon the exercise of such rights,
warrants or options, plus the consideration received by the
Corporation for the issuance or sale of such rights, warrants
or options, plus, in the case of such Convertible Securities,
the minimum aggregate amount, as set forth in the instrument
relating thereto without regard to any antidilution or similar
provisions contained therein for a subsequent adjustment of
such amount, of additional consideration, if any, other than
such Convertible Securities, payable upon the conversion or
exchange thereof, by (y) the total maximum number, as set
forth in the instrument relating thereto without regard to any
antidilution or similar provisions contained therein for a
subsequent adjustment of such amount, of shares of Common
Stock issuable upon the exercise of such rights, warrants or
options or upon the conversion or exchange of such Convertible
Securities issuable upon the exercise of such rights, warrants
or options) is less than either the Conversion Price or the
Market Price of the Common Stock as of the date of the
issuance or sale of such rights, warrants or options, then
such total maximum number of shares of Common Stock issuable
upon the exercise of such rights, warrants or options or upon
the conversion or exchange of such Convertible Securities (as
of the date of the issuance or sale of such
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<PAGE>
rights, warrants or options) shall be deemed to be "Common
Stock" for purposes of Paragraph 4(c)(i) hereof and shall be
deemed to have been sold for an amount equal to such
consideration per share and shall cause an adjustment to be
made in accordance with Paragraph 4(c)(i).
(C) In case of the sale or other issuance by the Corporation of
any Convertible Securities, whether or not the right of
conversion or exchange thereunder is immediately exercisable,
and the price per share for which Common Stock is issuable
upon the conversion or exchange of such Convertible Securities
(determined by dividing (x) the total amount of consideration
received by the Corporation for the sale of such Convertible
Securities, plus the minimum aggregate amount, as set forth in
the instrument relating thereto without regard to any
antidilution or similar provisions contained therein for a
subsequent adjustment of such amount, of additional
consideration, if any, other than such Convertible Securities,
payable upon the conversion or exchange thereof, by (y) the
total maximum number, as set forth in the instrument relating
thereto without regard to any antidilution or similar
provisions contained therein for a subsequent adjustment of
such amount, of shares of Common Stock issuable upon the
conversion or exchange of such Convertible Securities) is less
than either the Conversion Price or the Market Price of the
Common Stock as of the date of the sale of such Convertible
Securities, then such total maximum number of shares of Common
Stock issuable upon the conversion or exchange of such
Convertible Securities (as of the date of the sale of such
Convertible Securities) shall be deemed to be "Common Stock"
for purposes of Paragraph 4(c)(i) and shall be deemed to have
been sold for an amount equal to such consideration per share
and shall cause an adjustment to be made in accordance with
Paragraph 4(c)(i).
(D) In case the Corporation shall modify the rights of conversion,
exchange or exercise of any of the securities referred to in
Subparagraphs (B) or (C) of this Paragraph 4(c)(v) or any
other securities of the Corporation convertible, exchangeable
or exercisable for shares of Common Stock, for any reason
other than an event that would require adjustment to prevent
dilution, so that the consideration per share received by the
Corporation after such modification is less than either the
Conversion Price or the Market Price of the Common Stock as of
the date prior to such modification, then such securities, to
thc extent not theretofore exercised, converted or exchanged,
shall be deemed to have expired or terminated immediately
prior to the date of such modification and the Corporation
shall be deemed for purposes of calculating any adjustments
pursuant to this Subsection 4(c) to have issued such new
securities upon such new terms ante date of modification Such
adjustment shall become effective as of the date upon which
such modification shall take effect. On the expiration or
cancellation of any such right, warrant or option or the
termination or cancellation of any such right to convert or
exchange any such Convertible Securities, the Conversion Price
then in effect hereunder
9
<PAGE>
shall forthwith be readjusted to such Conversion Price as
would have obtained (a) had the adjustments made upon the
issuance or sale of such rights, warrants, options or
Convertible Securities been made upon the basis of the
issuance of only the number of shares of Common Stock
theretofore actually delivered (and the total consideration
received therefor) upon the exercise of such rights, warrants
or options or upon the conversion or exchange of such
Convertible Securities and (b) had adjustments been made on
the basis of the Conversion Price as adjusted under clause (a)
for all transactions (which would have affected such adjusted
Conversion Price) made alter the issuance or sale of such
rights, warrants, options or Convertible Securities.
(E) In case of the sale of any shares of Common Stock, any
Convertible Securities, any rights or warrants to subscribe
for or purchase, or any options for the purchase of, Common
Stock or Convertible Securities, the consideration received by
the Corporation therefor shall be deemed to be the gross sales
price therefor without deducting therefrom any expense paid or
incurred by the Corporation or any underwriting discounts or
commissions or concessions paid or allowed by the Corporation
in connection therewith. In the event that any securities
shall be issued in connection with any other securities of the
Corporation, together comprising one integral transaction in
which no specific consideration is allocated among the
securities, then each of such securities shall be deemed to
have been issued for such consideration as the Board of
Directors of the Corporation determines in good faith;
provided, however, that if holders of more than 25% of the
then outstanding Series B Preferred Stock disagree with such
determination, the Corporation shall retain, at its own
expense, an independent investment banking firm for the
purpose of obtaining an appraisal.
(vi) Notwithstanding any other provision hereof, no adjustment to
the Conversion Price will be made:
(A) upon (i) the exercise of any of the options outstanding on the
date hereof under the Corporation's existing stock option
plans or (ii) the issuance or exercise of options which may
hereafter be granted with the approval of the Board of
Directors, or exercised, under any bona fide employee benefit
plan of the Corporation approved by the Board of Directors to
officers, directors, consultants or employees, but only with
respect to such options as are exercisable at prices no lower
than the Closing Bid Price (or, if the prices referenced in
the definition of Closing Bid Price cannot be determined, the
Fair Market Value) of the Common Stock as of thc date of grant
thereof; or
(B) Upon the sale of any shares of Common Stock, warrants to
purchase Common Stock or Convertible Securities in a firm
commitment underwritten public offering, including, without
limitation, shares sold
10
<PAGE>
upon the exercise of any overallotment option granted to the
underwriters in connection with such offering; or
(C) Upon the issuance or sale of Common Stock or Convertible
Securities pursuant to the exercise of any rights, options or
warrants to receive, subscribe for or purchase, or any options
for the purchase of, Common Stock or Convertible Securities,
whether or not such rights, warrants or options were
outstanding on the date of the original sale of the Series B
Preferred Stock or were thereafter issued or sold, provided
that an adjustment was either made or not required to be made
in accordance with Paragraph 4(c)(i) in connection with the
issuance or sale of such securities or any modification of the
terms thereof; or
(D) Upon the issuance or sale of Common Stock upon conversion or
exchange of any Convertible Securities, provided that any
adjustments required to be made upon the issuance or sale of
such Convertible Securities or any modification of the terms
thereof were so made, and whether or not such Convertible
Securities were outstanding on the date of the original sale
of the Series B Preferred Stock or were thereafter issued or
sold.
Subparagraph 4(c)(v)(D) shall nevertheless apply to any modification
of the rights of conversion, exchange or exercise of any of the
securities referred to in Subparagraph (A) or, to the extent
effected with respect to less than all of the outstanding Series B
Preferred Stock, as the case may be, (C) of this Paragraph 4(c)(vi).
(vii) As used in this Subsection 4(c), the term "Common Stock" shall
mean and include the Corporation's Common Stock authorized on the
date of the original issue of the Series B Convertible Preferred
Stock and shall also include any capital stock of any class of the
Corporation thereafter authorized which shall not be limited to a
fixed sum or percentage in respect of the rights of the holders
thereof to participate in dividends and in the distribution of
assets upon the voluntary liquidation, dissolution or winding up of
the Corporation; provided, however, that the shares issuable upon
conversion of the Series B Preferred Stock shall include only shares
of such class designated in the Corporation's Certificate of
Incorporation as Common Stock on the date of the original issue of
the Series B Convertible Preferred Stock or (i) in the case of any
reclassification, change, consolidation, merger, sale or conveyance
of the character referred to in Paragraph 4(c)(ii) hereof, the
stock, securities or property provided for in such section or (ii)
in the case of any reclassification or change in the outstanding
shares of Common Stock issuable upon conversion of the Series B
Preferred Stock as a result of a subdivision or combination or
consisting of a change in par value, or from par value to no par
value, or from no par value to par value, such shares of Common
Stock as so reclassified or changed.
(viii) Any determination as to whether an adjustment in the
Conversion Price in effect hereunder is required pursuant to
Subsection 4(c), or as to the amount of
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<PAGE>
any such adjustment, if required, shall be binding upon the holders
of the Series B Preferred Stock and the Corporation if made in good
faith by agreement of the Corporation and the holders of a majority
of the Preferred Stock then outstanding. If the holders of a
majority of the Preferred Stock then outstanding and the Corporation
shall disagree as to any adjustment, then the issue shall be
submitted to and determined by an arbitration panel of the American
Arbitration Association in New York City in accordance with its
rules, the cost of which arbitration shall be paid for by the
Corporation.
(d) No Fractional Shares. No fractional shares or scrip representing
fractional shares of Common Stock shall be issued upon conversion of Series B
Preferred Stock. If more than one certificate evidencing shares of Series B
Preferred Stock shall be surrendered for conversion at one time by the same
holder, the number of Bill shares issuable upon conversion thereof shall be
computed on the basis of the aggregate number of shares of Series B Preferred
Stock so surrendered. Instead of any fractional share of Common Stock which
would otherwise be issuable upon conversion of any shares of Series B Preferred
Stock, the Corporation shall pay a cash adjustment in respect of such fractional
interest in an amount equal to the same fraction of the Market Price of the
Common Stock as of the close of business on the day of conversion.
(e) Grant of Rights, Warrants or Options in Lieu of Adjustment. If and
whenever the Corporation shall grant to the holders of Common Stock, as such,
rights or warrants to subscribe for or to purchase, or any options for the
purchase of, Common Stock or securities convertible into or exchangeable for or
carrying a right, warrant or option to purchase Common Stock, the Company may at
its option elect concurrently therewith to grant, to each holder (as of the
record date for such transaction) of Series B Preferred Stock then outstanding,
the rights, warrants or options to which each such holder would have been
entitled if, on the record date used to determine the stockholders entitled to
the rights, warrants or options being granted by the Company, such holder were
the holder of record of the number of whole shares of Common Stock then issuable
upon conversion of his or her Series B Preferred Stock. If the Company shall so
elect under this Subsection 4(e), then such grant by the Company to the holders
of the Series B Preferred Stock shall be in lieu of any adjustment which
otherwise may be called for pursuant to Subsection 4(c).
(f) Reservation of Shares; Transfer Taxes; Etc. The Corporation shall at
all times reserve and keep available, out of its authorized and unissued shares
of Common Stock, solely for the purpose of effecting thc conversion of the
Series B Preferred Stock, such number of shares of its Common Stock free of
preemptive rights as shall be sufficient to effect the conversion of all shares
of Series B Preferred Stock from time to time outstanding. The Corporation shall
use its best efforts from time to time, in accordance with thc laws of the State
of Delaware, to increase the authorized number of shares of Common Stock if at
any time the number of shares of authorized, unissued and unreserved Common
Stock shall not be sufficient to permit the conversion of all the
then-outstanding shares of Series B Preferred Stock.
The Corporation shall pay any and all issue or other taxes that may
be payable in respect of any issue or delivery of shares of Common Stock on
conversion of the Series B Preferred Stock. The Corporation shall not, however,
be required to pay any tax which may be payable in respect of any transfer
involved in the issue or delivery of Common Stock (or other
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<PAGE>
securities or assets) in a name other than that in which the shares of Series B
Preferred Stock so converted were registered, and no such issue or delivery
shall be made unless and until the person requesting such issue has paid to the
Corporation the amount of such, tax or has established, to the satisfaction of
the Corporation, that such tax has been paid.
(g) Prior Notice of Certain Events. In case:
(i) the Corporation shall declare any dividend (or any other
distribution); or
(ii) the Corporation shall authorize the granting to the holders of
Common Stock of rights or warrants to subscribe for or purchase any
shares of stock of any class or of any other rights or warrants; or
(iii) of any reclassification of Common Stock (other than a
subdivision or combination of the outstanding Common Stock, or a
change in par value, or from par value to no par value, or from no
par value to par value); or
(iv) of any consolidation or merger (including, without limitation,
a Merger Transaction) to which the Corporation is a party and for
which approval of any stockholders of the Corporation shall be
required, or of the sale or transfer of all or substantially all of
the assets of the Corporation or of any compulsory share exchange
whereby the Common Stock is converted into other securities, cash or
other property; or
(v) of the voluntary or involuntary dissolution, liquidation or
winding up of the Corporation (including, without limitation, a
Liquidation Event);
then the Corporation shall cause to be filed with the Transfer
Agent, and shall cause to be mailed to the holders of record of the Series B
Preferred Stock, at their last addresses as they shall appear upon the stock
transfer books of the Corporation, at least 20 days prior to the applicable
record date hereinafter specified, a notice stating (x) the date on which a
record (if any) is to be taken for the purpose of such dividend, distribution or
granting of rights or warrants or, if a record is not to be taken, the date as
of which the holders of Common Stock of record to be entitled to such dividend,
distribution, rights or warrants are to be determined and a description of the
cash, securities or other property to be received by such holders upon such
dividend, distribution or granting of rights or warrants or (y) the date on
which such reclassification, consolidation, merger, sale, transfer, share
exchange, dissolution, liquidation or winding up or other Liquidation Event is
expected to become effective, the date as of which it is expected that holders
of Common Stock of record shall be entitled to exchange their shares of Common
Stock for securities or other property deliverable upon such exchange,
dissolution, liquidation or winding up or other Liquidation Event and the
consideration, including securities or other property, to be received by such
holders upon such exchange; provided however, that no failure to mail such
notice or any defect therein or in the mailing thereof shall affect the validity
of the corporate action required to be specified in such notice.
(h) Other Changes in Conversion Rate. The Corporation from time to time
may increase the Conversion Rate by any amount for any period of time if the
period is at least 20 days and if the increase is irrevocable during the period.
Whenever the Conversion Rate is so
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<PAGE>
increased, the Corporation shall mail to holders of record of the Series B
Preferred Stock a notice of the increase at least 15 days before the date the
increased Conversion Rate takes effect, and such notice shall state the
increased Conversion Rate and the period it will be in effect.
The Corporation may make such increases in the Conversion Rate, in
addition to those required or allowed by this Section 4, as shall bc determined
by it, as evidenced by a resolution of the Board of Directors, to be advisable
in order to avoid or diminish any income tax to holders of Common Stock
resulting from any dividend or distribution of stock or issuance of rights or
warrants to purchase or subscribe for stock or from any event treated as such
for income tax purposes.
Notwithstanding anything to the contrary herein, in no case shall
the Conversion Price be adjusted to an amount less than $.00025 per share, the
current par value of the Common Stock into which the Series B Preferred Stock is
convertible.
(i) Ambiguities/Errors. The holders of a majority of the Series B
Preferred Stock outstanding and the Corporation shall have the power to resolve
by agreement any ambiguity or correct any error in the provisions relating to
the convertibility of the Series B Preferred Stock, and their actions in so
doing shall be final and conclusive. If the holders of a majority of the Series
B Preferred Stock then outstanding and the Corporation shall disagree as to any
ambiguity or correction of any error in the provisions relating to the
convertibility of the Series B Preferred Stock then the issue shall be submitted
to and determined by an arbitration panel of the American Arbitration
Association in New York City in accordance with its rules, the cost of which
arbitration shall be paid for by the Corporation.
5. Mandatory Conversion. At any time on or after the ________ Date, the
Corporation, at its option, may cause the Series B Preferred Stock to be
converted in whole, or in part, on a pro rata basis, into fully paid and
nonassessable shares of Common Stock at the then effective Conversion Rate and
such other securities and property as herein provided if the closing bid price
of the Common Stock shall have exceeded 200% of the then applicable Conversion
Price for at least 20 trading days in any 30 consecutive trading day period
ending three (3) days prior to the date of notice of conversion. Any shares of
Series B Preferred Stock so convened shall be treated as having been surrendered
by the holder thereof far conversion pursuant to Section 4 on the date of such
mandatory conversion (unless previously converted at the option of the holder).
No greater than 60 nor fewer than 20 days prior to the date of any
such mandatory conversion, notice by first class mail, postage prepaid, shall be
given to the holders of record of the Series B Preferred Stock to be convened,
addressed to such holders at their last addresses as shown on the stock transfer
books of the Corporation. Each such notice shall specify the date fixed for
conversion, the place or places for surrender of shares of Series B Preferred
Stock, and the then effective Conversion Rate pursuant to Section 4.
Any notice which is mailed as herein provided shall be conclusively
presumed to have been duly given by the Corporation on the date deposited in the
mail, whether or not the holder of the Series B Preferred Stock receives such
notice; and failure properly to give such notice by mail, or any defect in such
notice, to the holders of the shares to be converted shall not
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<PAGE>
affect the validity of the proceedings for the conversion of any other shares of
Series B Preferred Stock. On or after the date fixed for conversion as stated in
such notice, each holder of shares called to be converted shall surrender the
certificate evidencing such shares to the Corporation at the place designated in
such notice for conversion. Notwithstanding that the certificates evidencing any
shares properly called for conversion shall not have been surrendered, the
shares shall no longer be deemed outstanding and all rights whatsoever with
respect to the shares so called for conversion (except the right of the holders
to convert such shares upon surrender of their certificates therefor) shall
terminate.
6. Voting Rights.
(a) General. Except as otherwise provided herein, in the Certificate of
Incorporation, the By-laws, or by law the holders of shares of Series B
Preferred Stock, the holders of shares of Common Stock and the holders of any
other class or series of shares entitled to vote with the Common Stock shall
vote together as one class on all matters submitted to a vote of stockholders of
the Corporation. In any such vote, each share of Series B Preferred Stock shall
entitle the bolder thereof to cast the number of votes equal to the number of
votes which could be cast in such vote by a holder of the Common Stock into
which such share of Series B Preferred Stock is convertible on the record date
for such vote, or if no record date has been established, on the date such vote
is taken. Any shares of Series B Preferred Stock held by the Corporation or any
entity controlled by the Corporation shall not have voting rights hereunder and
shall not be counted in determining the presence of a quorum.
(b) Class Voting Rights. In addition to any vote specified in Section
6(a), so long as 50% of the shares of Series B Preferred Stock shall be
outstanding, the affirmative vote or consent of the holders or at least 66.67%
of all outstanding Series B Preferred Stock voting separately as a class shall
be necessary to permit or effect any one or more of the following: (i) the
amendment, alteration or repeal of any provision of the Certificate of
Incorporation, or the Bylaws of the Corporation so as adversely to affect the
relative rights, preferences, qualifications, limitations or restrictions of the
Series B Preferred Stock, (ii) the authorization or issuance, or increase of the
authorized amount of, any security ranking prior to, or on a parity with, the
Series B Preferred Stock (A) upon a Liquidation Event or (B) with respect to the
payment of any dividends or distributions or (C) with respect to voting rights,
(iii) the amendment, alteration or repeal of any provision of or the rights,
preferences, or privileges of the Series B Preferred Stock, (iv) any
liquidation, dissolution or sale of all or substantially all of the assets of
the Corporation, (v) the incurrence of indebtedness in excess of $100,000 in the
aggregate (other than non-recourse equipment lease lines secured solely by the
purchased equipment and indebtedness incurred for working capital purposes
secured solely by the receivables and inventory of the Corporation) or (vi) the
repurchase of any of the securities of the Corporation (other than repurchases
from employees of the Corporation of restricted securities issued pursuant to
employee benefit plans approved by the Corporation's Board of Directors in
connection with termination of employment at prices no greater than the prices
paid by any such employees for such restricted securities). The vote as
contemplated herein shall specifically not be required for (x) issuances of
Common Stock, (y) the authorization, issuance or increase in the amount of the
Series B Preferred Stock prior to the Final Closing Date or (z) any
consolidation or merger of the Corporation with or into another corporation in
which the Corporation is not the
15
<PAGE>
surviving entity, a sale or transfer of all or past of the Corporation's assets
for cash, securities or other property, or a compulsory share exchange.
7. Outstanding Shares. For purposes of this Certificate of Designation,
all issued shares of Series B Preferred Stack shall be deemed outstanding except
(i) from the date, or the deemed date, of surrender of' certificates evidencing
shares of Series B Preferred Stock, all shares of Series B Preferred Stock
converted into Common Stock, (ii) from the date of registration of transfer, all
shares of Series B Preferred Stock held of record by the Corporation or any
subsidiary of the Corporation and (iii) any and all shares of Series B Preferred
Stock held in escrow prior to delivery of such stock by the Corporation to the
initial beneficial owners thereof.
8. Status of Acquired Shares. Shares of Series B Preferred Stock received
upon conversion pursuant to Section 4 or Section 5 or otherwise acquired by thc
Corporation will be restored to the status of authorized but unissued shares of
Preferred Stock, without designation as to class, and may thereafter be issued,
but not as shares of Series B Preferred Stock.
9. Preemptive Rights. The Series A Preferred Stock is not entitled to any
preemptive or subscription rights in respect of any securities of thc
Corporation.
10. No Amendment or Impairment. The Corporation shall not amend its
Certificate of Incorporation or participate in any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, for the purpose of avoiding or seeking to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation, but will at all times in good faith assist in
carrying out all such action as may be reasonably necessary or appropriate in
order to protect the rights of the holders of the Series B Preferred Stock
against impairment.
11. Severability of Provisions. Whenever possible, each provision hereof
shall be interpreted in a manner as to be effective and valid under applicable
law, but if any provision hereof is held to be prohibited by or invalid under
applicable law, such provision shall be ineffective only to the extent of such
prohibition or invalidity, without invalidating or otherwise adversely affecting
the remaining provisions hereof. If a court of competent jurisdiction should
determine that a provision hereof would be valid or enforceable if a period of
time were extended or shortened or a particular percentage were increased or
decreased, then such court may make such change as shall be necessary to render
the provision in question effective and valid under applicable law.
* * * * * * *
16
<PAGE>
IN WITNESS WHEREOF, Conversion Technologies International, Inc. has caused
this certificate to be signed on its behalf by _______________, its
____________, this ___ day of ________, 1999.
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
By: ________________________________________
Name:
Title: President and Chief Executive Officer
ATTEST:
____________________________
<PAGE>
State of Delaware
Office of the Secretary of State
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE RESTATED CERTIFICATE OF
"CONVERSION TECHNOLOGIES INTERNATIONAL, INC.", FILED IN THIS OFFICE ON THE SIXTH
DAY OF DECEMBER, A.D. 1995, AT 4 O'CLOCK P.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE
COUNTY RECORDER OF DEEDS FOR RECORDING.
[ SEAL ] ______________________________________
Edward J. Freel, Secretary of 'State
AUTHENTICATION: 7738877
234150 8100 DATE: 12-06-95
CERTIFICATE OF MERGER
OF
CTI SUBSIDIARY CORP.
INTO
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
The undersigned corporation DOES HEREBY CERTIFY:
FIRST: That the names and states of incorporation of each of the
constituent corporations of the merger is as follows:
NAME STATE OF INCORPORATION
CTI Subsidiary Corp. Delaware
Conversion Technologies International, Inc. Delaware
SECOND: That an agreement of merger between the parties to the merger has
been approved, adopted, certified, executed and acknowledged by each of the
constituent corporations in accordance with the requirements of subsection (c)
of Section 251 of the General Corporation Law of the State of Delaware.
THIRD: The name of the surviving corporation of the merger is Conversion
Technologies International, Inc., a Delaware corporation.
FOURTH: That the certificate of incorporation of Conversion Technologies
International, Inc., a Delaware corporation, shall, subject to the amendment
referred to in Paragraph FIFTH below, be the certificate of incorporation of the
surviving corporation.
FIFTH: That the first sentence of Article Fourth of the certificate of
Incorporation of the surviving corporation is amended by virtue of the merger to
read in its entirety as follows:
The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 215,000,000 shares,
consisting of (a) 200,000,000 shares of common stock, $.00025 par
value (the "Common Stock"), and (b) 15,000,000 shares of preferred
stock, $.001 par value (the "Preferred Stock").
SIXTH: That the executed agreement and plan of merger is on file at the
principal place of business of the surviving corporation. The address of said
principal place is 7 San Bartola Drive, St. Augustine, Florida 32086.
1
<PAGE>
SEVENTH: That a copy of the agreement and plan of merger will be furnished
on request and without cost to any stockholder of any constituent corporation.
Dated: September 24, 1999
Conversion Technologies International, Inc.
/s/ Eckardt C. Beck
-----------------------------------
Eckardt C. Beck, Authorized Officer
2
<PAGE>
AGREEMENT AND PLAN OF MERGER
BETWEEN
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
AND
CTI SUBSIDIARY CORP.
AGREEMENT AND PLAN OF MERGER ("Agreement") made by and between Conversion
Technologies International, Inc., a Delaware corporation ("Parent"), and CTI
Subsidiary Corp., a Delaware corporation ("Subsidiary"), which corporations are
sometimes referred to herein individually as a "Constituent Corporation" and
collectively as "Constituent Corporations."
W I T N E S S E T H:
WHEREAS, Parent owns all of the issued and outstanding stock of
Subsidiary; and
WHEREAS, Parent desires to increase the number of its authorized
shares of Common Stock, $.00025 par value per share, pursuant to a merger of
Subsidiary into Parent; and
WHEREAS, the Board of Directors of each of the Constituent
Corporations deems it advisable and in the best interests of each of the
Constituent Corporations and its stockholders that Subsidiary be merged into
Parent (hereinafter, in such capacity, sometimes referred to as the "Surviving
Corporation") as permitted by the Delaware General Corporation Law under and
pursuant to the terms hereinafter set forth;
NOW THEREFORE, the parties hereto have agreed as follows:
<PAGE>
ARTICLE I
PLAN OF MERGER
1.01. Plan Adopted. A plan of merger of each of the Constituent
Corporations, pursuant to the provisions of Section 251 of the Delaware General
Corporation Law, is adopted as follows:
(1) Upon the Effective Date, as hereinafter defined,
Subsidiary shall be merged with and into Parent.
(2) The surviving corporation shall be Parent.
(3) Upon the Effective Date, the separate existence of
Subsidiary shall cease, and the Surviving Corporation shall succeed, without
other transfer, to all the rights and property of Subsidiary and shall be
subject to all the debts and liabilities of Subsidiary as provided in Section
259 of the Delaware General Corporation Law.
(4) On and after the Effective Date, the Surviving Corporation
shall carry on its business with the assets of Subsidiary as well as with the
assets of the Surviving Corporation.
(5) Upon the Effective Date, each share of stock of
Subsidiary, issued and outstanding immediately prior to the Effective Date,
shall be automatically canceled and cease to exist by virtue of the merger and
without any action on the part of Parent as the holder thereof.
(6) Upon the Effective Date, each share of stock of Parent,
issued and outstanding immediately prior to the Effective Date, other than
shares of stock of Parent held by stockholders who perfect their appraisal
rights under the Delaware General Corporation Law, shall be unaffected and
unchanged by the merger and shall remain an issued and outstanding share of
- 2 -
<PAGE>
stock of the Company.
(7) Each share of stock of Parent as to which a written demand
for appraisal is made in accordance with Section 262 of the Delaware General
Corporation Law ("Section 262") and not withdrawn and as to which no written
consent to the merger is given, shall entitle the holder thereof to only those
rights accorded by Section 262 and Delaware law, unless and until the holder
thereof shall have failed to perfect or shall have effectively withdrawn or lost
such right to appraisal.
1.02. Effective Date. The effective time and date of the merger,
herein referred to as the "Effective Date," shall be the time at which a
Certificate of Merger is filed in the office of the Secretary of State of the
State of Delaware in accordance with the provisions of Section 251 of the
Delaware General Corporation Law.
ARTICLE II
CERTIFICATE OF INCORPORATION AND BYLAWS
2.01. The Restated Certificate of Incorporation of Parent shall be
amended in the merger to increase the authorized number of shares of Common
Stock of Parent, as set forth in the first sentence of Article Fourth of such
Restated Certificate of Incorporation, to two hundred million (200,000,000)
shares. Otherwise, the Restated Certificate of Incorporation of Parent shall be
unaffected by the merger, and, upon the Effective Date, shall continue in effect
as the Restated Certificate of Incorporation of the Surviving Corporation, until
amended or repealed in accordance with the provisions thereof and of applicable
law.
- 3 -
<PAGE>
2.02. The Bylaws of Parent shall be unaffected by the merger and,
upon the Effective Date, shall continue in effect as the Bylaws of the Surviving
Corporation, until amended or repealed in accordance with the provisions thereof
and of applicable law.
ARTICLE III
DIRECTORS AND OFFICERS
3.01. Directors. Upon the Effective Date, the directors of Parent
then in office shall be the directors of the Surviving Corporation.
3.02. Officers. All persons who as of the Effective Date shall be
officers of Parent shall remain as officers of the Surviving Corporation until
the Board of Directors of the Surviving Corporation shall otherwise determine.
The Board of Directors of the Surviving Corporation may elect or appoint such
additional officers as it may determine in accordance with the Bylaws of the
Surviving Corporation.
ARTICLE IV
TERMINATION
4.01. If the holders of more than 5% of the outstanding shares of
any class of Parent's stock seek to exercise appraisal rights under Section 262,
or if the Board of Directors of Parent determines it to be advisable for any
other reason, this Agreement may be terminated, and the merger herein provided
for may be abandoned, by the Board of Directors of Parent at any time prior to
the filing of the Certificate of Merger with respect to the merger provided for
in this Agreement in the office of the Secretary of State of the State of
Delaware.
- 4 -
<PAGE>
IN WITNESS WHEREOF, this Agreement, having first been duly approved
by the respective Boards of Directors of each Constituent Corporation, is hereby
executed on behalf of each of said corporations by their respective officers
thereunto duly authorized this 8th day of July, 1999.
CONVERSION TECHNOLOGIES
INTERNATIONAL, INC.
a Delaware corporation
By: /s/ Eckardt C. Beck
---------------------------------
Name: Eckardt C. Beck
Title: Acting President and Chief
Executive Officer
CTI SUBSIDIARY CORP.
a Delaware corporation
By: /s/ Eckardt C. Beck
---------------------------------
Name: Eckardt C. Beck
Title: Secretary and President
- 5 -
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
No. __
Senior Secured Note
$ New York, New York
_________, 1998
CONVERSION TECHNOLOGIES INTERNATIONAL, INC., a Delaware corporation,
(the "Company"), for value received, hereby promises to pay to The Aries Master
Fund, a Cayman Island Exempted Company, a successor in interest to The Aries
Fund, a Cayman Island Trust, or its registered assigns (the "Holder"), the
principal sum of __________________ Dollars ($______), with interest from the
date of issuance of this Senior Secured Note on the unpaid principal balance and
any additional amounts as set forth herein at a rate equal to twelve percent
(12%) per annum. The outstanding principal amount of this Note, together with
all accrued but unpaid interest, shall become due and payable, without any
demand or notice of any kind, upon the earliest to occur of any of the following
dates or events: (i) 12 months from the date hereof and (ii) the completion of
any financing of at least $1,500,000 (the "Maturity Date"). Payment shall be
made at such place as designated by the Holder upon surrender of this Senior
Secured Note, and shall be in such coin or currency of the United States of
America as at the time of payment shall be legal tender for the payment of
public and private debts. Interest shall be computed on the basis of a 360-day
year of twelve 30-day months. This Senior Secured Note is one of a duly
authorized issue of Conversion Technologies International, Inc. 12% Senior
Secured Notes in an aggregate principal amount of $1,290,000 (individually a
"Note" and collectively the "Notes") issued pursuant to a Senior Secured Line of
Credit Agreement dated as of May 8, 1998 as amended, between the Company and the
Holder (the "Line of Credit"). Except as set forth on Schedule 6 to the Line of
Credit, the Notes shall be senior to all other indebtedness of the Company
("Other Indebtedness") and all Other Indebtedness shall be subordinated to the
Notes. The Notes are secured by the receivables and inventory of the Company and
the Subsidiaries now owned and hereafter owned or acquired.
SECTION 1. Prepayment.
The Company may at any time, upon thirty (30) days prior written
notice to the Holder, prepay in whole or part the principal sum, plus accrued
interest to date of payment, of this Note, without penalty or premium. All sums
paid hereon shall be applied first to accrued but unpaid interest on this Note
and the balance, if any, to the reduction of the principal hereof. This Note
shall not be due and payable until the Maturity Date. Once the Maturity Date has
been reached, all amounts evidenced by this Note shall be due and payable.
SECTION 2. Repayment Right.
(a) Upon an Event of Default, the Holder may require the Company to
repay (the "Repayment Right") all or any portion of the outstanding principal
amount of this Note and accrued interest (the "Repayment Amount") by requiring
the Company to deliver shares of common stock of the Company (the "Common
Stock") equal in value to the Repayment
<PAGE>
Amount. The Holder may exercise this Repayment Right from time to time, in whole
or in installments. The Common Stock issued by the Company to repay the
Repayment Amount shall be valued at the last sale price of the Common Stock on
the business day prior to the Demand Date (as defined in the Line of Credit) or,
in case no such reported sales take place on such day, the average of the last
reported bid and asked prices of the Common Stock on such day, in either case on
the principal national securities exchange on which the Common Stock is admitted
to trading or listed, or if not listed or admitted to trading on any such
exchange, the representative closing bid price of the Common Stock as reported
by the NASDAQ Bulletin Board ("NASDAQ"), or other similar organization if NASDAQ
is no longer reporting such information, or if not so available, the fair market
price of the Common Stock as determined in good faith by the Board of Directors.
Notwithstanding the foregoing, this Repayment Right of the Holder will not be
exercisable until 90 days after the date of an Event of Default, provided, that,
the Company is using its best efforts to cure such Event of Default.
(b) The Company agrees to cooperate with the Holders to facilitate
the timely preparation and delivery of certificates representing the shares of
Common Stock issued pursuant to the Repayment Right free of any restrictive
legends to the extent not required at such time and in such denominations and
registered in such names as Holders may request no later than three (3) business
days following exercise of the Repayment Right pursuant to Section 2(a).
(c) The Company agrees that the Company will, at all times, have
authorized and in reserve, and will keep available, solely for issuance or
delivery upon the exercise of the Repayment Right, the shares of the Common
Stock and other securities and properties as from time to time shall be
receivable upon the exercise of such Repayment Right, free and clear of all
restrictions on sale or transfer, except for the restrictions on sale or
transfer set forth in the Securities Act, and restrictions created by or on
behalf of the Holder, and free and clear of all preemptive rights and rights of
first refusal.
SECTION 3. Covenants of the Company.
Until such time as the principal amount of this Note and all accrued
interest thereon has been repaid in full, the Company and the Subsidiaries shall
adhere to the covenants set forth in Section 5 of the Line of Credit.
SECTION 4. Events of Default Defined.
An Event of Default under this Note shall be as set forth in Section
7 of the Line of Credit Agreement.
SECTION 5. Remedies upon Event of Default.
(a) Upon the occurrence of an Event of Default,
(i) the entire principal amount of, and all accrued and unpaid
interest on, this Note shall automatically become immediately due and payable
without presentment, demand, protest or other formalities of any kind, all of
which are hereby expressly waived by the Company;
2
<PAGE>
(ii) additional interest shall begin to accrue, and shall be
considered immediately due and payable, on the unpaid principal amount of this
Note at the rate of eighteen percent (18%) per annum and shall continue to
accrue until the initial interest and additional interest is paid;
(iii) the Company shall assign to the Holder all right, title
and interest in the assets set forth on Schedule 1.1 of the Line of Credit; and
(iv) the Holder may take any action available to it hereunder
(including without limitation, the Repayment Right), under the Line of Credit or
at law or in equity or by statute or otherwise.
(b) No remedy herein conferred upon the Holder of this Note is
intended to be exclusive of any other remedy and each and every such remedy
shall be cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law or in equity or by statute or
otherwise.
SECTION 6. Note Register.
(a) The Company shall keep at its principal executive office a
register (herein referred to as the "Note Register"), in which, subject to such
reasonable regulations may prescribe, but at its expense (other than transfer
taxes, if any), the Company shall provide for the registration and transfer of
this Note.
(b) Whenever this Note shall be surrendered at the principal
executive office of the Company for transfer or exchange, accompanied by a
written instrument of transfer in form reasonably satisfactory to the Company
duly executed by the Holder hereof or his attorney duly authorized in writing,
the Company shall execute and deliver in exchange therefor a new Note or Notes,
as may be requested by such Holder, in the same aggregate unpaid principal
amount and payable on the same date as the principal amount of the Note or Notes
so surrendered; each such new Note shall be dated as of the date to which
interest has been paid on the unpaid principal amount of the Note or Notes so
surrendered and shall be in such principal amount and registered in such name or
names as such Holder may designate in writing.
(c) Upon receipt by the Company of evidence reasonably satisfactory
to it of the loss, theft, destruction or mutilation of this Note and of
indemnity reasonably satisfactory to it, and upon reimbursement to the Company
of all reasonable expenses incidental thereto, and upon surrender and
cancellation of this Note (in case of mutilation) the Company will make and
deliver in lieu of this Note a new Note of like tenor and unpaid principal
amount and dated as of the date to which interest has been paid on the unpaid
principal amount of this Note in lieu of which such new Note is made and
delivered.
SECTION 7. Registration Under Securities Act of 1933.
The Holder of this Note shall have registration rights as provided
in Section 6 of the Warrant, with respect to the shares of Common Stock issuable
pursuant to the Repayment Right.
3
<PAGE>
SECTION 8. Miscellaneous.
(a) Amendments and Waivers. The holders of sixty-six and two-thirds
percent (66 2/3%) or more in principal amount of outstanding Notes of this issue
may waive or otherwise consent to the amendment of any of the provisions hereof,
provided that no such waiver or amendment may reduce the principal amount of or
interest on any of the Notes of this issue or change the stated maturity of the
principal or reduce the percentage of holders of Notes of this issue necessary
to waive or amend the provisions of this Note, without the consent of each
holder of any Note affected thereby.
(b) Restrictions on Transferability. In addition to the restrictions
set forth in Section 7 of this Note, the securities represented by this Note
have been acquired for investment and have not been registered under the
Securities Act of 1933, as amended, or the securities laws of any state or other
jurisdiction. Without such registration, such securities may not be sold,
pledged, hypothecated or otherwise transferred, except pursuant to exemptions
from the Securities Act of 1933, as amended, and the securities laws of any
state or other jurisdiction. Notwithstanding the above, the holder of this Note
has been provided the registration rights contained in Section 5 of the Warrant
with respect to the shares of Common Stock which may be acquired pursuant to
Section 2.
(c) Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of New York, excluding the body of law
relating to conflict of laws. Notwithstanding anything to the contrary contained
herein, in no event may the effective rate of interest collected or received by
the Holder exceed that which may be charged, collected or received by the Holder
under applicable law.
(d) Interpretation. If any term or provision of this Note shall be
held invalid, illegal or unenforceable, the validity of all other terms and
provisions hereof shall in no way be affected thereby.
(e) Successors and Assigns. This Note shall be binding upon the
Company and its successors and assigns and shall inure to the benefit of the
Holder and its successors and assigns.
(f) Notices. All notices, requests, consents and demands shall be
made in writing and shall be mailed postage prepaid, or delivered by hand, to
the Company or to the Holder thereof at their respective addresses set forth
below or to such other address as may be furnished in writing to the other party
hereto:
If to the Holder: Paramount Capital Asset Management, Inc.
787 Seventh Avenue, 48th Floor
New York, NY 10019
Attn: Michael S. Weiss
Tel: 212-554-4350
Fax: 212-554-4355
4
<PAGE>
If to the Company: Conversion Technologies International, Inc.
7 San Bartola Drive
St. Augustine, Florida 32086
Attn: Eckardt C. Beck
Tel: 904-808-0503
Fax: 904-808-8791
(g) Saturdays, Sundays, Holidays. If any date that may at any time
be specified in this Note as a date for the making of any payment of principal
or interest under this Note shall fall on Saturday, Sunday or on a day which in
New York shall be a legal holiday, then the date for the making of that payment
shall be the next subsequent day which is not a Saturday, Sunday or legal
holiday.
(h) Line of Credit. This Note is subject to the terms contained in
the Line of Credit dated of even date herewith between the Company and the
Holder of this Note, and such Holder is entitled to the benefits of such Line of
Credit and may, in addition to any rights hereunder, enforce the agreements of
the Company contained therein and exercise the remedies provided for thereby or
otherwise available in respect thereof.
(i) Further Assurances. The Company agrees, at its expense, to
promptly execute, acknowledge, deliver and cause to be duly filed all such
further instruments and documents and to promptly take all such actions as the
Holder may from time to time request to (i) better assure, preserve, protect and
perfect the security interest (the "Security Interest") in the receivables and
inventory of the Company and the Subsidiaries now owned and hereafter owned or
acquired and the rights and remedies created hereby, including the payment of
any fees and taxes required in connection with the execution and delivery of
this Agreement, the granting of the Security Interest and the filing of any
financing statements (including fixture filings), UCC- 1's or other documents in
connection herewith and (ii) to effect the various transactions contemplated
herein.
IN WITNESS WHEREOF, this Note has been executed and delivered as a
sealed instrument on the date first above written by the duly authorized
representative of the Company.
ATTEST: CONVERSION TECHNOLOGIES
INTERNATIONAL, INC.
_________________________ By: __________________________________
Name: Eckardt C. Beck
Title: Acting Chief Executive Officer
(Corporate Seal)
5
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
No.__
Senior Secured Note
$ New York, New York
___________, 1999
CONVERSION TECHNOLOGIES INTERNATIONAL, INC., a Delaware corporation,
(the "Company"), for value received, hereby promises to pay to The Aries
Domestic Fund, L.P., a Delaware limited partnership, or its registered assigns
(the "Holder"), the principal sum of ________________ Dollars ($______), with
interest from the date of issuance of this Senior Secured Note on the unpaid
principal balance and any additional amounts as set forth herein at a rate equal
to twelve percent (12%) per annum. The outstanding principal amount of this
Note, together with all accrued but unpaid interest, shall become due and
payable, without any demand or notice of any kind, upon the earliest to occur of
any of the following dates or events: (i) 12 months from the date hereof and
(ii) the completion of any financing of at least $1,500,000 (the "Maturity
Date"). Payment shall be made at such place as designated by the Holder upon
surrender of this Senior Secured Note, and shall be in such corn or currency of
the United States of America as at the time of payment shall be legal tender for
the payment of public and private debts. Interest shall be computed on the basis
of a 360-day year of twelve 30-day months. This Senior Secured Note is one of a
duly authorized issue of Conversion Technologies International, Inc. 12% Senior
Secured Notes in an aggregate principal amount of $1,290,000 (individually a
"Note" and collectively the "Notes") issued pursuant to a Senior Secured Line of
Credit Agreement dated as of May 8, 1998, as amended, between the Company and
the Holder (the "Line of Credit"). Except as set forth on Schedule 6 to the Line
of Credit, the Notes shall be senior to all other indebtedness of the Company
("Other Indebtedness") and all Other Indebtedness shall be subordinated to the
Notes. The Notes are secured by the receivables and inventory of the Company and
the Subsidiaries now owned and hereafter owned or acquired.
SECTION 1. Prepayment.
The Company may at any time, upon thirty (30) days prior written
notice to the Holder, prepay in whole or part the principal sum, plus accrued
interest to date of payment, of this Note, without penalty or premium. All sums
paid hereon shall be applied first to accrued but unpaid interest on this Note
and the balance, if any, to the reduction of the principal hereof. This Note
shall not be due and payable until the Maturity Date. Once the Maturity Date has
been reached, all amounts evidenced by this Note shall be due and payable.
SECTION 2. Repayment Right.
(a) Upon an Event of Default, the Holder may require the Company to
repay (the "Repayment Right") all or any portion of the outstanding principal
amount of this Note and accrued interest (the "Repayment Amount") by requiring
the Company to deliver shares of common stock of the Company (the "Common
Stock") equal in value to the Repayment Amount. The Holder may exercise this
Repayment Right from time to time, in whole or in
<PAGE>
installments. The Common Stock issued by the Company to repay the Repayment
Amount shall be valued at the last sale price of the Common Stock on the
business day prior to the Demand Date (as defined in the Line of Credit) or, in
case no such reported sales take place on such day, the average of the last
reported bid and asked prices of the Common Stock on such day, in either case on
the principal national securities exchange on which the Common Stock is admitted
to trading or listed, or if not listed or admitted to trading on any such
exchange, the representative closing bid price of the Common Stock as reported
by the NASDAQ Bulletin Board ("NASDAQ"), or other similar organization if NASDAQ
is no longer reporting such information, or if not so available, the fair market
price of the Common Stock as determined in good faith by the Board of Directors.
Notwithstanding the foregoing, this Repayment Right of the Holder will not be
exercisable until 90 days after the date of an Event of Default, provided, that,
the Company is using its best efforts to cure such Event of Default.
(b) The Company agrees to cooperate with the Holders to facilitate
the timely preparation and delivery of certificates representing the shares of
Common Stock issued pursuant to the Repayment Right free of any restrictive
legends to the extent not required at such time and in such denominations and
registered in such names as Holders may request no later than three (3) business
days following exercise of the Repayment Right pursuant to Section 2(a).
(c) The Company agrees that the Company will, at all times, have
authorized and in reserve, and will keep available, solely for issuance or
delivery upon the exercise of the Repayment Right, the shares of the Common
Stock and other securities and properties as from time to time shall be
receivable upon the exercise of such Repayment Right, free and clear of all
restrictions on sale or transfer, except for the restrictions on sale or
transfer set forth in the Securities Act, and restrictions created by or on
behalf of the Holder, and free and clear of all preemptive rights and rights of
first refusal.
SECTION 3. Covenants of the Company.
Until such time as the principal amount of this Note and all accrued
interest thereon has been repaid in full, the Company and the Subsidiaries shall
adhere to the covenants set forth in Section 5 of the Line of Credit.
SECTION 4. Events of Default Defined.
An Event of Default under this Note shall be as set forth in Section
7 of the Line of Credit Agreement.
SECTION 5. Remedies upon Event of Default.
(a) Upon the occurrence of an Event of Default,
(i) the entire principal amount of, and all accrued and unpaid
interest on, this Note shall automatically become immediately due and payable
without presentment, demand, protest or other formalities of any kind, all of
which are hereby expressly waived by the Company;
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(ii) additional interest shall begin to accrue, and shall be
considered immediately due and payable, on the unpaid principal amount of this
Note at the rate of eighteen percent (18%) per annum and shall continue to
accrue until the initial interest and additional interest is paid;
(iii) the Company shall assign to the Holder all right, title
and interest in the assets set forth on Schedule 1.1 of the Line of Credit; and
(iv) the Holder may take any action available to it hereunder
(including without limitation, the Repayment Right), under the Line of Credit or
at law or in equity or by statute or otherwise.
(b) No remedy herein conferred upon the Holder of this Note is
intended to be exclusive of any other remedy and each and every such remedy
shall be cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law or in equity or by statute or
otherwise.
SECTION 6. Note Register.
(a) The Company shall keep at its principal executive office a
register (herein referred to as the "Note Register"), in which, subject to such
reasonable regulations may prescribe, but at its expense (other than transfer
taxes, if any), the Company shall provide for the registration and transfer of
this Note.
(b) Whenever this Note shall be surrendered at the principal
executive office of the Company for transfer or exchange, accompanied by a
written instrument of transfer in form reasonably satisfactory to the Company
duly executed by the Holder hereof or his attorney duly authorized in writing,
the Company shall execute and deliver in exchange therefor a new Note or Notes,
as may be requested by such Holder, in the same aggregate unpaid principal
amount and payable on the same date as the principal amount of the Note or Notes
so surrendered; each such new Note shall be dated as of the date to which
interest has been paid on the unpaid principal amount of the Note or Notes so
surrendered and shall be in such principal amount and registered in such name or
names as such Holder may designate in writing.
(c) Upon receipt by the Company of evidence reasonably satisfactory
to it of the loss, theft, destruction or mutilation of this Note and of
indemnity reasonably satisfactory to it, and upon reimbursement to the Company
of all reasonable expenses incidental thereto, and upon surrender and
cancellation of this Note (in case of mutilation) the Company will make and
deliver in lieu of this Note a new Note of like tenor and unpaid principal
amount and dated as of the date to which interest has been paid on the unpaid
principal amount of this Note in lieu of which such new Note is made and
delivered.
SECTION 7. Registration Under Securities Act of 1933.
The Holder of this Note shall have registration rights as provided
in Section 6 of the Warrant, with respect to the shares of Common Stock issuable
pursuant to the Repayment Right.
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SECTION 8. Miscellaneous.
(a) Amendments and Waivers. The holders of sixty-six and two-thirds
percent (66 2/3%) or more in principal amount of outstanding Notes of this issue
may waive or otherwise consent to the amendment of any of the provisions hereof,
provided that no such waiver or amendment may reduce the principal amount of or
interest on any of the Notes of this issue or change the stated maturity of the
principal or reduce the percentage of holders of Notes of this issue necessary
to waive or amend the provisions of this Note, without the consent of each
holder of any Note affected thereby.
(b) Restrictions on Transferability. In addition to the restrictions
set forth in Section 7 of this Note, the securities represented by this Note
have been acquired for investment and have not been registered under the
Securities Act of 1933, as amended, or the securities laws of any state or other
jurisdiction. Without such registration, such securities may not be sold,
pledged, hypothecated or otherwise transferred, except pursuant to exemptions
from the Securities Act of 1933, as amended, and the securities laws of any
state or other jurisdiction. Notwithstanding the above, the holder of this Note
has been provided the registration rights contained in Section 5 of the Warrant
with respect to the shares of Common Stock which may be acquired pursuant to
Section 2.
(c) Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of New York, excluding the body of law
relating to conflict of laws. Notwithstanding anything to the contrary contained
herein, in no event may the effective rate of interest collected or received by
the Holder exceed that which may be charged, collected or received by the Holder
under applicable law.
(d) Interpretation. If any term or provision of this Note shall be
held invalid, illegal or unenforceable, the validity of all other terms and
provisions hereof shall in no way be affected thereby.
(e) Successors and Assigns. This Note shall be binding upon the
Company and its successors and assigns and shall inure to the benefit of the
Holder and its successors and assigns.
(f) Notices. All notices, requests, consents and demands shall be
made in writing and shall be mailed postage prepaid, or delivered by hand, to
the Company or to the Holder thereof at their respective addresses set forth
below or to such other address as may be furnished in writing to the other party
hereto:
If to the Holder: Paramount Capital Asset Management, Inc.
787 Seventh Avenue, 48th Floor
New York, NY 10019
Attn: Michael S. Weiss
Tel: 212-554-4350
Fax: 212-554-4355
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If to the Company: Conversion Technologies International, Inc.
7 San Bartola Drive
St. Augustine, Florida 32086
Attn: Eckardt C. Beck
Tel: 904-808-0503
Fax: 904-808-8791
(g) Saturdays, Sundays, Holidays. If any date that may at any time
be specified in this Note as a date for the making of any payment of principal
or interest under this Note shall fall on Saturday, Sunday or on a day which in
New York shall be a legal holiday, then the date for the making of that payment
shall be the next subsequent day which is not a Saturday, Sunday or legal
holiday.
(h) Line of Credit. This Note is subject to the terms contained in
the Line of Credit dated of even date herewith between the Company and the
Holder of this Note, and such Holder is entitled to the benefits of such Line of
Credit and may, in addition to any rights hereunder, enforce the agreements of
the Company contained therein and exercise the remedies provided for thereby or
otherwise available in respect thereof.
(i) Further Assurances. The Company agrees, at its expense, to
promptly execute, acknowledge, deliver and cause to be duly filed all such
further instruments and documents and to promptly take all such actions as the
Holder may from time to time request to (i) better assure, preserve, protect and
perfect the security interest (the "Security Interest") in the receivables and
inventory of the Company and the Subsidiaries now owned and hereafter owned or
acquired and the rights and remedies created hereby, including the payment of
any fees and taxes required in connection with the execution and delivery of
this Agreement, the granting of the Security Interest and the filing of any
financing statements (including fixture filings), UCC- 1's or other documents in
connection herewith and (ii) to effect the various transactions contemplated
herein.
IN WITNESS WHEREOF, this Note has been executed and delivered as a
sealed instrument on the date first above written by the duly authorized
representative of the Company.
ATTEST: CONVERSION TECHNOLOGIES
INTERNATIONAL, INC.
______________________ By:___________________________
Name: Eckardt C. Beck
Title: Acting Chief Executive Officer
(Corporate Seal)
5
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
THIS SUBSCRIPTION AGREEMENT (the "Agreement") made as of the date set
forth on the signature page hereof between Conversion Technologies
International, Inc., a Delaware corporation (the "Company"), and the undersigned
(the "Subscriber").
WHEREAS, the Company desires to issue in a private placement to accredited
investors (the "Offering") a minimum of 580 units (the "Minimum Offering") and a
maximum of 1,000 units (the "Maximum Offering") (such units being collectively
referred to herein as the "Units"), each Unit consisting of five thousand
(5,000) shares of a newly authorized series of the Company's preferred stock
referred to as Series B Convertible Preferred Stock, par value $.001 per share,
stated value $.60 per share (the "Series B Preferred Stock"), each such share
being convertible at the option of the holder at any time after the initial
issuance date into twenty (20) shares of the Company's common stock, par value
$.00025 per share (the "Common Stock"), based on a current conversion price of
$.03 per share (the Series B Preferred Stock and the Common Stock issuable upon
conversion thereof being sometimes referred to collectively herein as the
"Securities");
WHEREAS, the Subscriber desires to purchase the number of Units set forth
on the signature page hereof.
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants hereinafter set forth, the parties hereto do hereby agree as follows:
I. SUBSCRIPTION FOR UNITS AND REPRESENTATIONS BY SUBSCRIBER
1.1 Subject to the terms and conditions set forth in this Agreement and in
the Confidential Private Placement Memorandum, dated April 8, 1999, as it may be
supplemented and amended (the "Memorandum") with respect to the Offering, the
Subscriber hereby subscribes for and agrees to purchase from the Company the
number of Units or fractions thereof set forth on the signature page hereof at a
price equal to $3,000 per Unit, and the Company agrees to sell such number of
Units for said purchase price. The purchase price is payable by (i) check or
money order made payable to "Graham & James LLP Escrow Agent, F/B/O Conversion
Technologies International, Inc." or (ii) wire transfer in accordance with the
wire transfer instructions set forth on Exhibit A hereto, contemporaneously with
the execution and delivery of this Agreement. Certificates representing the
Series B Preferred Stock purchased by each Subscriber will be delivered by the
Company within ten (10) days following the consummation of the relevant Closing
Date as set forth in Article III hereof. The Subscriber understands, however,
that this purchase of Units is contingent upon (i) the Company making sales of a
minimum of five hundred eighty (580) Units prior to the termination date of the
Offering, (ii) the Company obtaining the consent of the holders of 66.67% of the
outstanding shares of Series A Preferred Stock (the "Requisite Supermajority")
for the authorization and issuance of the Series B Preferred Stock comprising
the Units offered hereby and (iii) the holders of a majority of the outstanding
voting stock approving the Merger and related transactions (as defined in the
Memorandum).
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1.2 The Subscriber recognizes that the purchase of the Units involves a
high degree of risk in that: (i) the Company has incurred losses since
inception, and, at June 30, 1998, had an accumulated deficit of $35,308,000 and
requires substantial funds in addition to the proceeds of this private placement
to continue its plan of operations; (ii) an investment in the Company is highly
speculative and only investors who can afford the loss of their entire
investment should consider investing in the Company and the Units; (iii) the
Subscriber may not be able to liquidate the Subscriber's investment; (iv)
transferability of the securities comprising the Units is extremely limited; and
(v) in the event of a disposition, an investor could sustain the loss of the
investor's entire investment. Furthermore, the proceeds of this private
placement are projected to last only a limited period of time. For a discussion
of significant risks involved with an investment in the Units, see the
Memorandum furnished by the Company to the Subscriber and the Company's Form
10-KSB for the year ended June 30, 1998 (the "Form 10-KSB")
1.3 The Subscriber represents that the Subscriber is an "accredited
investor" as such term is defined in Rule 501 of Regulation D promulgated under
the United States Securities Act of 1933, as amended (the "Act"), as indicated
by the Subscriber's responses to the questions contained in Article VII hereof,
and that the Subscriber is able to bear the economic risk of an investment in
the Units.
1.4 The Subscriber acknowledges that the Subscriber has prior investment
experience, including investment in non-listed and non-registered securities, or
the Subscriber has employed the services of an investment advisor, attorney or
accountant to evaluate the merits and risks of an investment in the Units on the
Subscriber's behalf, and that the Subscriber recognizes the highly speculative
nature of the Subscriber's investment.
1.5 The Subscriber acknowledges receipt and careful review of this
Agreement and all attachments hereto and the Memorandum, including the Form
10-KSB, the form of Certificate of Designation of Series B Preferred Stock and
the other exhibits thereto (collectively, the "Offering Documents"). The
Subscriber hereby represents that the Subscriber has been furnished by the
Company during the course of this transaction with all information regarding the
Company which the Subscriber had requested or desired to know, that all
documents which could be reasonably provided have been made available for the
Subscriber's inspection and review, and that such information and documents
have, in the Subscriber's opinion, afforded the Subscriber with substantially
all of the same information that would be provided the Subscriber in a
registration statement filed under the Act; and that the Subscriber has been
afforded the opportunity to ask questions of and receive answers from duly
authorized officers or other representatives of the Company concerning the terms
and conditions of the private placement, and any additional information which
the Subscriber had requested. The Subscriber hereby represents that, except as
set forth in the Offering Documents, no representations or warranties have been
made to the Subscriber by the Company or any agent, employee or affiliate of the
Company and in entering into this transaction, the Subscriber is not relying on
any information, other than that contained in the Offering Documents and the
results of independent investigation by the Subscriber.
1.6 The Subscriber hereby acknowledges that the private placement has not
been reviewed by the United States Securities and Exchange Commission ("SEC") or
any state regulatory authority, because of the Company's representations that
this is intended to be a
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nonpublic offering pursuant to Sections 3(b) or 4(2) of the Act. The Subscriber
represents that the Units are being purchased for the Subscriber's own account,
for investment and not for distribution or resale to others. The Subscriber
agrees that the Subscriber will not sell or otherwise transfer the securities
comprising the Units unless they are registered under the Act or unless an
exemption from such registration is available.
1.7 The Subscriber understands that the securities comprising the Units
have not been registered under the Act by reason of a claimed exemption under
the provisions of the Act which depends, in part, upon the Subscriber's
investment intention. In this connection, the Subscriber understands that it is
the position of the SEC that the statutory basis for such exemption would not be
present if the Subscriber's representation merely meant that the Subscriber's
present intention was to hold such securities for a short period, such as the
capital gains period of tax statutes, for a deferred sale, for a market rise,
assuming that a market develops, or for any other fixed period.
1.8 The Subscriber understands that Rule 144 (the "Rule") promulgated
under the Act requires, among other conditions, a one-year holding period prior
to the resale (in limited amounts) of securities acquired in a non-public
offering without having to satisfy the registration requirements under the Act.
The Subscriber understands that the Company makes no representation or warranty
regarding its fulfillment in the future of any reporting requirements under the
Securities Exchange Act of 1934, as amended, or its dissemination to the public
of any current financial or other information concerning the Company, as is
required by the Rule as one of the conditions of its availability and that the
Company is not presently in compliance with certain of such requirements. The
Subscriber understands and hereby acknowledges that the Company is under no
obligations to register any of the Units or any of the Securities comprising the
Units under the Act or any state securities or "blue sky" laws other than as set
forth in Article V. The Subscriber consents that the Company may, if it desires,
permit the transfer of the Securities out of the Subscriber's name only when the
Subscriber's request for transfer is accompanied by an opinion of counsel
reasonably satisfactory to the Company that neither the sale nor the proposed
transfer results in a violation of the Act or any applicable state "blue sky"
laws. The Subscriber agrees to hold the Company and its directors, officers and
controlling persons and their respective heirs, representatives, successors and
assigns harmless and to indemnify them against all liabilities, costs and
expenses incurred by them as a result of (i) any misrepresentation made by the
Subscriber contained herein (including the Confidential Purchaser Questionnaire,
contained in Article VII herein), (ii) any sale or distribution by the
undersigned Subscriber in violation of the Act or any applicable state
securities or "blue sky" laws, or (iii) any untrue statements of a material fact
made by the Subscriber and contained herein.
1.9 The Subscriber consents to the placement of a legend on any
certificate or other document evidencing the Securities stating that they have
not been registered under the Act and setting forth or referring to the
restrictions on transferability and sale thereof.
1.10 The Subscriber understands that the Company will review this
Agreement and is hereby given authority by the Subscriber to call the
Subscriber's bank or place of employment or otherwise review the financial
standing of the Subscriber; and it is further agreed that the Company reserves
the unrestricted right to reject or limit any subscription, to accept
subscriptions for fractional Units, and to close the Offering to the Subscriber
at any time.
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1.11 The Subscriber hereby represents that the address of Subscriber
furnished by the Subscriber at the end of this Agreement is the undersigned's
principal residence if the Subscriber is an individual or its principal business
address if it is a corporation or other entity.
1.12 The Subscriber acknowledges that if the Subscriber is a Registered
Representative of an NASD member firm, the Subscriber must give such firm the
notice required by the NASD's Rules of Fair Practice, receipt of which must be
acknowledged by such firm on the signature page hereof.
1.13 The Subscriber represents that the Subscriber has full power and
authority (corporate, statutory, and otherwise) to execute and deliver this
Agreement and to purchase the Units and the Securities. This Agreement
constitutes the legal, valid and binding obligation of the Subscriber,
enforceable against the Subscriber in accordance with its terms.
1.14 If the Subscriber is a corporation, partnership, limited liability
company, trust, employee benefit plan, individual retirement account, Keogh
Plan, or other entity, (a) it is authorized and qualified to become an investor
in the Company and the person signing this Agreement on behalf of such entity
has been fully authorized by such entity to do so and (b) it is duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization.
1.15 The Subscriber acknowledges that if he or she is a Registered
Representative of an NASD member firm, he or she must give such firm the notice
required by the NASD's Rules of Fair Practice, receipt of which must be
acknowledged by such firm in Section 7.4 below.
1.16 The Subscriber acknowledges that at such time, if ever, as the
Securities are registered, sales of the Securities will be subject to state
securities laws, including those of the State of New Jersey which require any
securities sold in New Jersey to be sold through a registered broker-dealer or
in reliance upon an exemption from registration.
1.17 Subject to the proviso below, the Subscriber hereby agrees that from
the date hereof and continuing for a period of nine (9) months (the "Lock-Up
Period") from the effective date of the Shelf Registration Statement (as defined
in Section 5.2 hereof), the Subscriber will not, without the prior written
consent of the Company, offer, pledge, sell, contract to sell, grant any option
for the sale, of, or otherwise dispose of, directly or indirectly, 75% of the
Registrable Securities (as defined in Section 5.1) purchased or acquired by the
Subscriber, provided, however, that, following each three month period after the
Effective Date, an amount of Registrable Securities equal to 25% of the number
of Registrable Securities purchased or acquired by the Subscriber shall become
exempt from the lock-up provisions contained in this sentence. For the sake of
clarity, 25% of the Registrable Securities will not be subject to any lock-up.
In addition, the Subscriber agrees that during the period from the date that the
Subscriber was first contacted with respect to the potential purchase of
Securities through the last date upon which the Subscriber holds any Securities
or Registrable Securities, the Subscriber will not directly or indirectly,
through related parties, affiliates or otherwise sell "short" or "short against
the box" (as those terms are generally understood) or otherwise engage in any
"hedging" transactions with respect to any equity security of the Company;
provided, however, that it shall not be a violation of this Section 1.17, if the
Subscriber places a sell order for Registrable
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Securities prior to the conversion of the Series B Preferred Stock or at the
time the conversion is requested, relies on the Company to deliver such
Registrable Securities in accordance with Section 5.4(h) and completes the sale
of such Registrable Securities before the Company delivers the Registrable
Securities to the Subscriber. In addition, the Subscriber agrees that during any
applicable Lock-Up Period it will not convert any of the Series B Preferred
Stock with respect to which the underlying Registrable Securities are subject to
such Lock-Up Period.
1.18 By tendering a subscription hereunder, the Subscriber, as a holder of
Series A Convertible Preferred Stock of the Company, (i)consents to the
authorization and issuance of all shares of Series B Preferred Stock comprising
the Units offered in the Offering, and (ii) covenants to deliver a written
consent in the form provided in the Memorandum to approve a merger of the
Company's wholly-owned subsidiary, CTI Subsidiary Corp., with and into the
Company and (iii) an increase in the authorized shares of Common Stock of the
Company to 175,000,000 in connection with such merger..
II. REPRESENTATIONS BY AND COVENANTS OF THE COMPANY
2.1 The Company represents and warrants to the Subscriber that, as of the
date of the execution of this Subscription Agreement by the Company:
(a) Organization, Good Standing and Qualification. Each of the
Company and Dunkirk International Glass and Ceramics Corporation and Advanced
Particle Technologies, Inc. (collectively, the "Subsidiaries") is a corporation
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and has full corporate power and authority to
conduct its business as described in the Memorandum. Each of the Company and the
Subsidiaries is duly qualified to do business as a foreign corporation and is in
good standing in each jurisdiction in which the laws require the Company or the
Subsidiaries to be so qualified and/or authorized to do business.
(b) Authorization. The execution, delivery and performance of this
Agreement by the Company will have been duly approved by the Board of Directors
of the Company and all other actions required to authorize and effect the offer
and sale of the Securities will have been duly taken and approved.
(c) Capitalization and Voting Rights. The authorized, issued and
outstanding capital stock of the Company is as set forth in the Memorandum under
"Capitalization"; all issued and outstanding shares of the Company are validly
issued, fully paid and nonassessable. The Series B Preferred Stock comprising
the Units have been duly and validly authorized and, when issued and paid for
pursuant to this Agreement, will be validly issued, fully paid and
nonassessable. Except as set forth in the Offering Documents, there are no
outstanding options, warrants, agreements, convertible securities, preemptive
rights or other rights to subscribe for or to purchase any shares of capital
stock of the Company. Except as set forth in the Offering Documents, in this
Agreement and as otherwise required by law, there are no restrictions upon the
voting or transfer of the Series B Preferred Stock pursuant to the Company's
Certificate of Incorporation, as amended (the "Certificate of Incorporation"),
By-Laws or other governing documents or any agreement or other instruments to
which the Company is a party or by which the Company is bound.
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(d) No Conflict; Governmental and Other Consents.
(i) The execution and delivery of this Agreement, the issuance
of the Units and the Securities comprising the Units, and the incurrence of the
obligations herein set forth and the consummation of the transactions herein
contemplated, will not result in a violation of, or constitute a default under,
the certificate of incorporation (except that the issuance of Common Stock
underlying the Series B Preferred Stock is subject to increase in the authorized
Common Stock of the Company) or by-laws of the Company or of either of the
Subsidiaries or in the performance or observance of any material obligations,
agreement, covenant or condition contained in any bond, debenture, note or other
evidence of indebtedness to which the Company or either of the Subsidiaries is a
party, or by which it or any of its properties may be bound or in violation of
any material order, rule, regulations, writ, injunction, or decree of any
government, governmental instrumentality or court, domestic or foreign.
(ii) No consent, approval, authorization or other order of any
governmental authority or other third-party is required to be obtained by the
Company or the Subsidiaries in connection with the authorization, execution and
delivery of this Agreement or with the authorization, issue and sale of the
Units or the Securities comprising the Units, except such filings as may be
required to be made with the SEC, the National Association of Securities
Dealers, Inc. and with any state or blue sky or securities regulatory authority.
2.2 Offering Documents; Disclosure. No information set forth in any of the
Offering Documents contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements contained
therein, in light of the circumstances under which they were made, not
misleading.
2.3 Investment Company. The Company is not an "investment company" within
the meaning of such term under the Investment Company Act of 1940, as amended,
and the rules and regulations of the SEC thereunder.
2.4 Authorized Shares. The Company shall (i) use its best efforts to
effect the Merger (as defined in the Memorandum), and in connection therewith to
increase the authorized shares of Common Stock of the Company to 175,000,000 on
or prior to the initial closing, (ii) at all times after the date upon which
such Common Stock is authorized, reserve and keep available out of its
authorized but unissued shares of Common Stock solely for the purpose of
effecting the conversion of the shares of Series B Preferred Stock, such number
of shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of the Series B Preferred Stock and (iii)
use its best efforts to obtain the consent of the Requisite Supermajority for
the authorization and issuance of the Series B Preferred Stock on or prior to
the initial closing. No shares of Series B Preferred Stock shall be convertible
into Common Stock unless and until the authorized Common Stock has been
increased as described in the preceding sentence.
III. TERMS OF SUBSCRIPTION
3.1 The offering period (the "Offering Period") shall begin on the date of
the Memorandum. Upon receipt of the Minimum Offering amount and consents of the
Requisite
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Supermajority, the Company may conduct a closing and may conduct subsequent
closings on an interim basis thereafter (each a "Closing") until the Maximum
Offering amount has been reached (the "Final Closing Date"). After sale of the
Minimum Offering, the Offering will continue until the earlier of the sale of
all the Units has been completed or such later date as the Company agrees to
terminate this Offering. The purchase price is payable by check or money order
made payable to "Graham & James LLP, Escrow Agent, F/B/O Conversion Technologies
International, Inc.", or payable by wire transfer to the account of Graham &
James LLP, the escrow agent (the "Escrow Agent"), in accordance with the wire
transfer instructions set forth on Exhibit A hereto.
3.2 To induce Graham & James LLP to serve as the Escrow Agent and to act
in such capacity hereunder, the Company and the Escrow Agent have entered into a
separate agreement (the "Escrow Agreement"), a copy of which is annexed hereto
as Exhibit B. In connection therewith, it is further agreed by the parties
hereto that:
(a) The Escrow Agent shall not be liable, except for its own gross
negligence or willful misconduct and, except with respect to claims based upon
such gross negligence or willful misconduct that are successfully asserted
against the Escrow Agent, the undersigned and the Company hereby agree to
jointly and severally indemnify and hold harmless the Escrow Agent from and
against any and all losses, liabilities, claims, actions, damages and expenses,
including, without limitation, reasonable attorneys' fees and disbursements,
arising out of or in connection with this Escrow Agreement.
(b) The Subscriber understands and agrees that, notwithstanding its
duties as Escrow Agent under the Escrow Agreement, the Escrow Agent is the
attorney for the Company, and, accordingly, neither any services provided by the
Escrow Agent as Escrow Agent nor any provisions of the Escrow Agreement, either
express or implied, shall restrict or otherwise limit the Escrow Agent in any
way from representing the Company or its affiliates in any action, dispute,
controversy, arbitration, suit or negotiation arising under this Agreement, the
Escrow Agreement or under any other agreement or in any manner or context
whatsoever, whether or not directly or indirectly involving the Company or its
affiliates.
3.3 The Units will by offered by the Company on a pro rata basis to each
of the Current Holders. In the event that any of the Current Holders do not
purchase their pro rata portion of the Units within ten (10) business days of
receiving the Offering Documents, the Units may be reoffered on a pro rata basis
to the Current Holders who elect to purchase their pro rata portion of the
Units.
3.4 Pending the sale of the Units, all funds paid hereunder shall be held
in an account under the control of the Escrow Agent in accordance with the terms
of the Escrow Agreement. If the Company shall not have obtained subscriptions
(including this subscription) for purchases of five hundred eighty (580) Units
on or before the Final Closing Date, then this subscription shall be void and
all funds paid hereunder by the Subscriber shall be promptly returned to the
Subscriber, without interest, subject to paragraph 3.6 hereof.
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3.5 The Subscriber hereby authorizes and directs the Company to deliver
the Securities to be issued to the Subscriber pursuant to this Agreement to the
residential or business address indicated on the signature page hereto.
3.6 The Subscriber hereby authorizes and directs the Escrow Agent to
return any funds for unaccepted subscriptions to the same account from which the
funds were drawn or to return such funds to the residential or business address
indicated on the signature page hereto.
IV. CONDITIONS TO OBLIGATIONS OF THE SUBSCRIBERS
4.1 The Subscribers' obligation to purchase the Units at the closings
(each, a "Closing") is subject to the fulfillment on or prior to each Closing of
the following conditions, which conditions may be waived at the option of each
Subscriber to the extent permitted by law:
(a) The representations and warranties made by the Company in
Article II hereof shall be true and correct in all material respects when made,
and shall be true and correct in all material respects on each Closing with the
same force and effect as if they had been made on and as of said date.
(b) All covenants, agreements and conditions contained in this
Agreement to be performed by the Company on or prior to such purchase shall have
been performed or complied with in all material respects.
(c) There shall not then be in effect any legal or other order
enjoining or restraining the transactions contemplated by this Agreement.
(d) There shall not be in effect any law, rule or regulation
prohibiting or restricting such sale or requiring any consent or approval of any
person which shall not have been obtained to issue the Securities (except as
otherwise provided in this Agreement).
(e) The Company shall have received binding subscriptions for at
least five hundred eighty (580) Units.
(f) The Company shall have received consents of the Requisite
Supermajority.
(g) The Company shall have received consents of the holders of a
majority of the outstanding voting stock approving the Merger and related
transactions (as defined in the Memorandum).
V. REGISTRATION RIGHTS
5.1 As used in this Agreement, the following terms shall have the
following meanings:
(a) "Affiliate" shall mean, with respect to any Person (as defined
below), any other Person controlling, controlled by or under direct or indirect
common control with such Person (for the purposes of this definition "control,"
when used with respect to any specified Person, shall mean the power to direct
the management and policies of such person, directly or
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indirectly, whether through ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" shall have meanings
correlative to the foregoing).
(b) "Business Day" shall mean a day Monday through Friday on which
banks are generally open for business in New York.
(c) "Holders" shall mean the Subscribers and any person holding
Registrable Securities (including the shares of Common Stock issuable upon
conversion of the Series B Preferred Stock) or any person to whom the rights
under Section 5 have been transferred in accordance with Section 5.9 hereof.
(d) "Person" shall mean any person, individual, corporation, limited
liability company, partnership, trust or other nongovernmental entity or any
governmental agency, court, authority or other body (whether foreign, federal,
state, local or otherwise).
(e) The terms "register," "registered" and "registration" refer to
the registration effected by preparing and filing a registration statement in
compliance with the Act, and the declaration or ordering of the effectiveness of
such registration statement.
(f) "Registrable Securities" shall mean (i) the shares of Common
Stock issuable upon the conversion of the Series B Preferred Stock, and (ii) any
shares of Common Stock issued as (or issuable upon the conversion of any
warrant, right or other security which is issued as) a dividend or other
distribution with respect to or in replacement of the Securities; provided,
however, that securities shall only be treated as Registrable Securities if and
only for so long as they (A) have not been disposed of pursuant to a
registration statement declared effective by the SEC, (B) have not been sold in
a transaction exempt from the registration and prospectus delivery requirements
of the Act so that all transfer restrictions and restrictive legends with
respect thereto are removed upon the consummation of such sale or (C) are held
by a Holder or a permitted transferee pursuant to Section 5.9.
(g) "Registration Expenses" shall mean all expenses incurred by the
Company in complying with Section 5.2 hereof, including, without limitation, all
registration, qualification and filing fees, printing expenses, escrow fees,
fees and expenses of counsel for the Company, blue sky fees and expenses and the
expense of any special audits incident to or required by any such registration
(but excluding the fees of legal counsel for any Holder)
(h) "Shelf Registration Statement" shall have the meaning ascribed
to such term in Section 5.2.
(i) "Registration Period" shall have the meaning ascribed to such
term in Section 5.4.
(j) "Selling Expenses" shall mean all underwriting discounts and
selling commissions applicable to the sale of Registrable Securities and all
fees and expenses of legal counsel for any Holder.
5.2 No later than sixty (60) days after the Final Closing Date (the
"Filing Date"), the Company shall use its best efforts to file a registration
statement (the "Shelf Registration
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Statement") with respect to the Registrable Securities with the SEC and use its
best efforts to cause the Shelf Registration Statement to be declared effective
by the SEC prior to the date which is 120 days following the Final Closing Date
(the "Targeted Effective Date") and use its best efforts to effect the
registration, qualifications or compliances (including, without limitation, the
execution of any required undertaking to file post-effective amendments,
appropriate qualifications or exemptions under applicable blue sky or other
state securities laws and appropriate compliance with applicable securities
laws, requirements or regulations) as may be requested and as would permit or
facilitate the sale and distribution of all Registrable Securities.
Notwithstanding the foregoing, the Company will not be obligated to enter into
any underwriting agreement for the sale of any of the Registrable Securities.
5.3 All Registration Expenses incurred in connection with any
registration, qualification, exemption or compliance pursuant to Section 5.2
shall be borne by the Company. All Selling Expenses relating to the sale of
securities registered by or on behalf of Holders shall be borne by such Holders
pro rata on the basis of the number of securities so registered.
5.4 In the case of the registration, qualification, exemption or
compliance effected by the Company pursuant to this Agreement, the Company
shall, upon reasonable request, inform each Holder as to the status of such
registration, qualification, exemption and compliance. At its expense the
Company shall:
(a) use its best efforts to keep such registration, and any
qualification, exemption or compliance under state securities laws which the
Company determines to obtain, continuously effective until the Holders have
completed the distribution described in the registration statement relating
thereto. The period of time during which the Company is required hereunder to
keep the Shelf Registration Statement effective is referred to herein as "the
Registration Period." Notwithstanding the foregoing, at the Company's election,
the Company may cease to keep such registration, qualification, exemption or
compliance effective with respect to any Registrable Securities, and the
registration rights of a Holder shall expire, at such time as the Holder has
completed the distribution described in the Shelf Registration Statement or
until the Holder may sell under Rule 144(k) under the Act (or other exemption
from registration acceptable to the Company) in a three-month period all
Registrable Securities then held by such Holder; and
(b) advise the Holders:
(i) when the Shelf Registration Statement or any amendment
thereto has been filed with the SEC and when the Shelf Registration Statement or
any post-effective amendment thereto has become effective;
(ii) of any request by the SEC for amendments or supplements
to the Shelf Registration Statement or the prospectus included therein or for
additional information;
(iii) of the issuance by the SEC of any stop order suspending
the effectiveness of the Shelf Registration Statement or the initiation of any
proceedings for such purpose;
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(iv) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Registrable Securities
included therein for sale in any jurisdiction or the initiation or threatening
of any proceeding for such purpose; and
(v) of the happening of any event that requires the making of
any changes in the Shelf Registration Statement or the prospectus so that, as of
such date, the statements therein are not misleading and do not omit to state a
material fact required to be stated therein or necessary to make the statements
therein (in the case of the prospectus, in the light of the circumstances under
which they were made) not misleading;
(c) make every reasonable effort to obtain the withdrawal of any
order suspending the effectiveness of any Shelf Registration Statement at the
earliest possible time;
(d) furnish to each Holder, without charge, at least one copy of
such Shelf Registration Statement and any post-effective amendment thereto,
including financial statements and schedules, and, if the Holder so requests in
writing, all exhibits (including those incorporated by reference) in the form
filed with the SEC;
(e) during the Registration Period, deliver to each Holder, without
charge, as many copies of the prospectus included in such Shelf Registration
Statement and any amendment or supplement thereto as such Holder may reasonably
request; and the Company consents to the use, consistent with the provisions
hereof, of the prospectus or any amendment or supplement thereto by each of the
selling Holders of Registrable Securities in connection with the offering and
sale of the Registrable Securities covered by the prospectus or any amendment or
supplement thereto. In addition, upon the reasonable request of the Holder and
subject in all cases to confidentiality protections reasonably acceptable to the
Company, the Company will meet with a Holder or a representative thereof at the
Company's headquarters to discuss all information relevant for disclosure in the
Shelf Registration Statement covering the Registrable Securities, and will
otherwise cooperate with any Holder conducting an investigation for the purpose
of reducing or eliminating such Holder's exposure to liability under the Act,
including the reasonable production of information at the Company's
headquarters;
(f) during the Registration Period, deliver to each Holder, without
charge, (i) as soon as practicable (but in the case of the annual report of the
Company to its stockholders, within 120 days after the end of each fiscal year
of the Company) one copy of: (A) its annual report to its stockholders, if any
(which annual report shall contain financial statements audited in accordance
with generally accepted accounting principles in the United States of America by
a firm of certified public accountants of recognized standing); (B) if not
included in substance in its annual report to stockholders, its annual report on
Form 10-KSB (or similar form); (C) each of its quarterly reports to its
stockholders, and, if not included in substance in its quarterly reports to
stockholders, its quarterly report on Form l0-QSB (or similar form), and (D) a
copy of the full Shelf Registration Statement (the foregoing, in each case,
excluding exhibits); and (ii) upon reasonable request, all exhibits excluded by
the parenthetical to the immediately preceding clause (D), and all other
information that is generally available to the public;
(g) prior to any public offering of Registrable Securities pursuant
to any Shelf Registration Statement, register or qualify or obtain an exemption
for offer and sale under the
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securities or blue sky laws of such jurisdictions as any such Holders reasonably
request in writing, provided that the Company shall not for any such purpose be
required to qualify generally to transact business as a foreign corporation in
any jurisdiction where it is not so qualified or to consent to general service
of process in any such jurisdiction, and do any and all other acts or things
necessary or advisable to enable the offer and sale in such jurisdictions of the
Registrable Securities covered by such Shelf Registration Statement;
(h) cooperate with the Holders to facilitate the timely preparation
and delivery of certificates representing Registrable Securities to be sold
pursuant to any Shelf Registration Statement free of any restrictive legends to
the extent not required at such time and in such denominations and registered in
such names as Holders may request at least three (3) business days prior to
sales of Registrable Securities pursuant to such Shelf Registration Statement;
(i) upon the occurrence of any event contemplated by Section
5.4(b)(v) above, the Company shall promptly prepare a post-effective amendment
to the Shelf Registration Statement or a supplement to the related prospectus,
or file any other required document so that, as thereafter delivered to
purchasers of the Registrable Securities included therein, the prospectus will
not include any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and
(j) use its best efforts to comply with all applicable rules and
regulations of the SEC, and will make generally available to the Holders not
later than 45 days (or 90 days if the fiscal quarter is the fourth fiscal
quarter) after the end of its fiscal quarter in which the first anniversary date
of the effective date of the Shelf Registration Statement occurs, an earnings
statement satisfying the provisions of Section 11(a) of the Act.
5.5 The Holders shall have no right to take any action to restrain, enjoin
or otherwise delay any registration pursuant to Section 5.2 hereof as a result
of any controversy that may arise with respect to the interpretation or
implementation of this Agreement.
5.6 (a) To the extent permitted by law, the Company shall indemnify each
Holder, each underwriter of the Registrable Securities and each person
controlling such Holder within the meaning of Section 15 of the Act, with
respect to which any registration, qualification or compliance has been effected
pursuant to this Agreement, against all claims, losses, damages and liabilities
(or action in respect thereof), including any of the foregoing incurred in
settlement of any litigation, commenced or threatened (subject to Section 5.6(c)
below), arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any registration statement,
prospectus or offering circular, or any amendment or supplement thereof,
incident to any such registration, qualification or compliance, or based on any
omission (or alleged omission) to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, in
light of the circumstances in which they were made, and will reimburse each
Holder, each underwriter of the Registrable Securities and each person
controlling such Holder, for legal and any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action as incurred; provided that the Company will not be liable in
any such case to the extent that any untrue statement or omission or allegation
thereof is made in reliance upon and in conformity
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<PAGE>
with written information furnished to the Company by or on behalf of such Holder
and stated to be specifically for use in preparation of such registration
statement, prospectus or offering circular; provided that the Company will not
be liable in any such case where the claim, loss, damage or liability arises out
of or is related to the failure of the Holder to comply with the covenants and
agreements contained in this Agreement respecting sales of Registrable
Securities, and except that the foregoing indemnity agreement is subject to the
condition that, insofar as it relates to any such untrue statement or alleged
untrue statement or omission or alleged omission made in the preliminary
prospectus but eliminated or remedied in the amended prospectus on file with the
SEC at the time the registration statement becomes effective or in the amended
prospectus filed with the SEC pursuant to Rule 424(b) or in the prospectus
subject to completion and term sheet under Rule 434 of the Act, which together
meet the requirements of Section 10(a) of the Act (the "Final Prospectus"), such
indemnity agreement shall not inure to the benefit of any such Holder, any such
underwriter or any such controlling person, if a copy of the Final Prospectus
furnished by the Company to the Holder for delivery was not furnished to the
person or entity asserting the loss, liability, claim or damage at or prior to
the time such furnishing is required by the Act and the Final Prospectus would
have cured the defect giving rise to such loss, liability, claim or damage.
(b) Each Holder will severally, if Registrable Securities held by
such Holder are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify the Company, each of
its directors and officers, each underwriter of the Registrable Securities and
each person who controls the Company within the meaning of Section 15 of the
Securities Act, against all claims, losses, damages and liabilities (or actions
in respect thereof), including any of the foregoing incurred in settlement of
any litigation, commenced or threatened (subject to Section 5.6(c) below),
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any registration statement, prospectus or offering
circular, or any amendment or supplement thereof, incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in light of the
circumstances in which they were made, and will reimburse the Company, such
directors and officers, each underwriter of the Registrable Securities and each
person controlling the Company for reasonable legal and any other expenses
reasonably incurred in connection with investigating or defending any such
claim, loss, damage, liability or action as incurred, in each case to the
extent, but only to the extent, that such untrue statement or omission or
allegation thereof is made in reliance upon and in conformity with written
information furnished to the Company by or on behalf of the Holder and stated to
be specifically for use in preparation of such registration statement,
prospectus or offering circular; provided that the indemnity shall not apply to
the extent that such claim, loss, damage or liability results from the fact that
a current copy of the prospectus was not made available to the Holder and such
current copy of the prospectus would have cured the defect giving rise to such
loss, claim, damage or liability. Notwithstanding the foregoing, in no event
shall a Holder be liable for any such claims, losses, damages or liabilities in
excess of the proceeds received by such Holder in the offering, except in the
event of fraud by such Holder.
(c) Each party entitled to indemnification under this Section 5.6
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim
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as to which indemnity may be sought, and shall permit the Indemnifying Party to
assume the defense of any such claim or any litigation resulting therefrom,
provided that counsel for the Indemnifying Party, who shall conduct the defense
of such claim or litigation, shall be approved by the Indemnified Party (whose
approval shall not unreasonably be withheld), and the Indemnified Party may
participate in such defense at such Indemnified Party's expense, and provided
further that the failure of any Indemnified Party to give notice as provided
herein shall not relieve the Indemnifying Party of its obligations under this
Agreement, unless such failure is materially prejudicial to the Indemnifying
Party in defending such claim or litigation. An Indemnifying Party shall not be
liable for any settlement of an action or claim effected without its written
consent (which consent will not be unreasonably withheld).
(d) If the indemnification provided for in this Section 5.6 is held
by a court of competent jurisdiction to be unavailable to an Indemnified Party
with respect to any loss, liability, claim, damage or expense referred to
therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified
Party thereunder, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such loss, liability, claim, damage or expense
in such proportion as is appropriate to reflect the relative fault of the
Indemnifying Party on the one hand and of the Indemnified Party on the other in
connection with the statements or omissions which resulted in such loss,
liability, claim, damage or expense as well as any other relevant equitable
considerations. The relative fault of the Indemnifying Party and of the
Indemnified Party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
Indemnifying Party or by the Indemnified Party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
5.7 (a) Upon receipt of any notice from the Company of the happening of
any event requiring the preparation of a supplement or amendment to a prospectus
relating to Registrable Securities so that, as thereafter delivered to the
Holders, such prospectus shall not contain an untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, each Holder will
forthwith discontinue disposition of Registrable Securities pursuant to the
registration statement contemplated by Section 5.2 until its receipt of copies
of the supplemented or amended prospectus from the Company and, if so directed
by the Company, each Holder shall deliver to the Company all copies, other than
permanent file copies then in such Holder's possession, of the prospectus
covering such Registrable Securities current at the time of receipt of such
notice.
(b) Each Holder shall suspend, upon request of the Company, any
disposition of Registrable Securities pursuant to the Shelf Registration
Statement and prospectus contemplated by Section 5.2 during (i) any period not
to exceed two 30-day periods within any one 12-month period the Company requires
in connection with a primary underwritten offering of equity securities and (ii)
any period, not to exceed one 30-day period per circumstance or development,
when the Company determines in good faith that offers and sales pursuant thereto
should not be made by reason of the presence of material undisclosed
circumstances or developments with respect to which the disclosure that would be
required in such a prospectus is premature, would have an adverse effect on the
Company or is otherwise inadvisable.
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(c) As a condition to the inclusion of its Registrable Securities,
each Holder shall furnish to the Company such information regarding such Holder
and the distribution proposed by such Holder as the Company may request in
writing or as shall be required in connection with any registration,
qualification or compliance referred to in this Article V.
(d) Each Holder hereby covenants with the Company (i) not to make
any sale of the Registrable Securities without effectively causing the
prospectus delivery requirements under the Act to be satisfied, and (ii) if such
Registrable Securities are to be sold by any method or in any transaction other
than on a national securities exchange, Nasdaq National Market, Nasdaq Small Cap
Market or in the over-the-counter market, in privately negotiated transactions,
or in a combination of such methods, to notify the Company at least five (5)
business days prior to the date on which the Holder first offers to sell any
such Registrable Securities.
(e) Each Holder acknowledges and agrees that the Registrable
Securities sold pursuant to the Shelf Registration Statement described in this
Section are not transferable on the books of the Company unless the stock
certificate submitted to the transfer agent evidencing such Registrable
Securities is accompanied by a certificate reasonably satisfactory to the
Company to the effect that (i) the Registrable Securities have been sold in
accordance with such Shelf Registration Statement and (ii) the requirement of
delivering a current prospectus has been satisfied.
(f) Each Holder agrees not to take any action with respect to any
distribution deemed to be made pursuant to such registration statement that
constitutes a violation of Regulation M under the Exchange Act or any other
applicable rule, regulation or law.
(g) At the end of the period during which the Company is obligated
to keep the Shelf Registration Statement current and effective as described
above, the Holders of Registrable Securities included in the Shelf Registration
Statement shall discontinue sales of shares pursuant to such Shelf Registration
Statement upon receipt of notice from the Company of its intention to remove
from registration the shares covered by such Shelf Registration Statement which
remain unsold, and such Holders shall notify the Company of the number of shares
registered which remain unsold immediately upon receipt of such notice from the
Company.
5.8 With a view to making available to the Holders the benefits of certain
rules and regulations of the SEC which at any time permit the sale of the
Registrable Securities to the public without registration, the Company shall use
its reasonable best efforts to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144 under the Act, at all times;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Exchange Act; and
(c) so long as a Holder owns any unregistered Registrable
Securities, furnish to such Holder upon any reasonable request a written
statement by the Company as to its compliance with Rule 144 under the Act, and
of the Exchange Act, a copy of the most recent annual or quarterly report of the
Company, and such other reports and documents of the
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Company as such Holder may reasonably request in availing itself of any rule or
regulation of the SEC allowing a Holder to sell any such securities without
registration.
5.9 The rights to cause the Company to register Registrable Securities
granted to the Holders by the Company under this Article 5 may be assigned in
full by a Holder in connection with a transfer by such Holder of its Registrable
Securities, provided, however, that (i) such transfer may otherwise be effected
in accordance with applicable securities laws; (ii) such Holder gives prior
written notice to the Company; and (iii) such transferee agrees to comply with
the terms and provisions of this Agreement, and such transfer is otherwise in
compliance with this Agreement. Except as specifically permitted by this Section
5.9, the rights of a Holder with respect to Registrable Securities as set out
herein shall not be transferable to any other Person, and any attempted transfer
shall cause all rights of such Holder therein to be forfeited.
5.10 With the written consent of the Company and the Holders holding at
least a majority of the Registrable Securities that are then outstanding, any
provision of this Article V may be waived (either generally or in a particular
instance, either retroactively or prospectively and either for a specified
period of time or indefinitely) or amended. Upon the effectuation of each such
waiver or amendment, the Company shall promptly give written notice thereof to
the Holders, if any, who have not previously received notice thereof or
consented thereto in writing
VI. MISCELLANEOUS
6.1 Any notice or other communication given hereunder shall be deemed
sufficient if in writing and sent by registered or certified mail, return
receipt requested, or delivered by hand against written receipt therefor,
addressed to Conversion Technologies International, Inc., 7 San Bartola Dr., St.
Augustine, FL 32086, Attn: President, and to the Subscriber at the Subscriber's
address indicated on the signature page of this Agreement. Notices shall be
deemed to have been given or delivered on the date of mailing, except notices of
change of address, which shall be deemed to have been given or delivered when
received.
6.2 Except as provided in Section 5.10 above, this Agreement shall not be
changed, modified or amended except by a writing signed by the parties to be
charged, and this Agreement may not be discharged except by performance in
accordance with its terms or by a writing signed by the party to be charged.
6.3 Subject to the provisions of Section 5.9, this Agreement shall be
binding upon and inure to the benefit of the parties hereto and to their
respective heirs, legal representatives, successors and assigns. This Agreement
sets forth the entire agreement and understanding between the parties as to the
subject matter hereof and merges and supersedes all prior discussions,
agreements and understandings of any and every nature among them.
6.4 Upon the execution and delivery of this Agreement by the Subscriber,
this Agreement shall become a binding obligation of the Subscriber with respect
to the purchase of Units as herein provided and subject to the conditions set
forth herein and in the Memorandum; subject, however, to the right hereby
reserved to the Company to enter into the same agreements with other subscribers
and to add and/or delete other persons as subscribers.
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6.5 NOTWITHSTANDING THE PLACE WHERE THIS AGREEMENT MAY BE EXECUTED BY ANY
OF THE PARTIES HERETO, THE PARTIES EXPRESSLY AGREE THAT ALL THE TERMS AND
PROVISIONS HEREOF SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS
OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. IN
THE EVENT THAT A JUDICIAL PROCEEDING IS NECESSARY, THE SOLE FORUM FOR RESOLVING
DISPUTES ARISING OUT OF OR RELATING TO THIS AGREEMENT IS THE SUPREME COURT OF
THE STATE OF NEW YORK IN AND FOR THE COUNTY OF NEW YORK OR THE FEDERAL COURTS
FOR SUCH STATE AND COUNTY, AND ALL RELATED APPELLATE COURTS, THE PARTIES HEREBY
IRREVOCABLY CONSENT TO THE JURISDICTION OF SUCH COURTS AND AGREE TO SAID VENUE.
6.6 In order to discourage frivolous claims the parties agree that unless
a claimant in any proceeding arising out of this Agreement succeeds in
establishing his claim and recovering a judgment against another party
(regardless of whether such claimant succeeds against one of the other parties
to the action), then the other party shall be entitled to recover from such
claimant all of its/their reasonable legal costs and expenses relating to such
proceeding and/or incurred in preparation therefor.
6.7 The holding of any provision of this Agreement to be invalid or
unenforceable by a court of competent jurisdiction shall not affect any other
provision of this Agreement, which shall remain in full force and effect. If any
provision of this Agreement shall be declared by a court of competent
jurisdiction to be invalid, illegal or incapable of being enforced in whole or
in part, such provision shall be interpreted so as to remain enforceable to the
maximum extent permissible consistent with applicable law and the remaining
conditions and provisions or portions thereof shall nevertheless remain in full
force and effect and enforceable to the extent they are valid, legal and
enforceable, and no provisions shall be deemed dependent upon any other covenant
or provision unless so expressed herein.
6.8 It is agreed that a waiver by either party of a breach of any
provision of this Agreement shall not operate, or be construed, as a waiver of
any subsequent breach by that same party.
6.9 The parties agree to execute and deliver all such further documents,
agreements and instruments and take such other and further action as may be
necessary or appropriate to carry out the purposes and intent of this Agreement.
6.10 This Agreement may be executed in two or more counterparts each of
which shall be deemed an original, but all of which shall together constitute
one and the same instrument.
6.11 (a) The Subscribers severally agree not to issue any public statement
with respect to the Subscribers' investment or proposed investment in the
Company or the terms of any agreement or covenant between them and the Company
without the Company's prior written consent, except such disclosures as may be
required under applicable law or under any applicable order, rule or regulation.
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(b) The Company agrees not to disclose the names, addresses or any
other information about the Subscribers, except as required by law; provided,
that the Company may use the name (but not the address) of the Subscriber in the
Shelf Registration Statement.
6.12 Each Subscriber severally represents and warrants that it has not
engaged, consented to nor authorized any broker, finder or intermediary to act
on its behalf, directly or indirectly, as a broker, finder or intermediary in
connection with the transactions contemplated by this Agreement. Each Subscriber
hereby severally agrees to indemnify and hold harmless the Company from and
against all fees, commissions or other payments owing to any such person or firm
acting on behalf of such Subscriber hereunder.
6.13 Nothing in this Agreement shall create or be deemed to create any
rights in any person or entity not a party to this Agreement, except for the
holders of Registrable Securities.
VII. CONFIDENTIAL INVESTOR QUESTIONNAIRE
7.1 The Subscriber represents and warrants that he, she or it comes within
one category marked below, and that for any category marked, he, she or it has
truthfully set forth, where applicable, the factual basis or reason the
Subscriber comes within that category. ALL INFORMATION IN RESPONSE TO THIS
SECTION WILL BE KEPT STRICTLY CONFIDENTIAL. The undersigned agrees to furnish
any additional information which the Company deems necessary in order to verify
the answers set forth below.
Category A ___ The undersigned is an individual (not a partnership,
corporation, etc.) whose individual net worth, or joint net
worth with his or her spouse, presently exceeds $1,000,000.
Explanation. In calculating net worth you may include
equity in personal property and real estate, including
your principal residence, cash, short-term investments,
stock and securities. Equity in personal property and
real estate should be based on the fair market value of
such property less debt secured by -such property
Category B ___ The undersigned is an individual (not a partnership,
corporation, etc.) who had an individual income in excess of
$200,000 in each of the two most recent years, or joint income
with his or her spouse in excess of $300,000 in each of those
years (in each case including foreign income, tax exempt
income and full amount of capital gains and losses but
excluding any income of other family members and any
unrealized capital appreciation) and has a reasonable
expectation of reaching the same income level in the current
year.
Category C ___ The undersigned is a director or executive officer of the
Company which is issuing and selling the Units.
Category D ___ The undersigned is a bank; a savings and loan association;
insurance company; registered investment company; registered
business development
18
<PAGE>
company; licensed small business investment company (`SBIC");
or employee benefit plan within the meaning of Title 1 of
ERISA and (a) the investment decision is made by a plan
fiduciary which is either a bank, savings and loan
association, insurance company or registered investment
advisor, or (b) the plan has total assets in excess of
$5,000,000 or (c) is a self directed plan with investment
decisions made solely by persons that are accredited
investors.
-----------------
-----------------
(describe entity)
Category E The undersigned is a private business development company as
defined in section 202(a)(22) of the Investment Advisors Act
of 1940.
-----------------
-----------------
(describe entity)
Category F The undersigned is either a corporation, partnership,
Massachusetts business trust, or non-profit organization
within the meaning of Section 501(c)(3) of the Internal
Revenue Code, in each case not formed for the specific purpose
of acquiring the Units and with total assets in excess of
$5,000,000.
-----------------
-----------------
(describe entity)
Category G The undersigned is a trust with total assets in excess of
$5,000,000, not formed for the specific purpose of acquiring
the Units, where the purchase is directed by a "sophisticated
investor" as defined in Regulation 506(b)(2)(ii) under the
Act.
-----------------
-----------------
(describe entity)
Category H The undersigned is an entity (other than a trust) all the
equity owners of which are "accredited investors' within one
or more of the above categories. If relying upon this Category
alone, each equity owner must complete a separate copy of this
Agreement.
-----------------
-----------------
(describe entity)
Category I The undersigned is not within any of the categories above and
is therefore not an accredited investor.
19
<PAGE>
7.2 SUITABILITY (please answer each question)
(a) For an individual Subscriber, please describe your current employment,
including the company by which you are employed and its principal business:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(b) For an individual Subscriber, please describe any college or graduate
degrees held by you:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(c) For all Subscribers, please list types of prior investments:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(d) For all Subscribers, please state whether you have participated in other
private placements before:
YES |_| NO |_|
(e) If your answer to question (d) above was "YES", please indicate frequency of
such prior participation in private placements of:
Public Private Public or Private
Companies Companies Biotechnology Companies
Frequently _________ _________ _______________________
Occasionally _________ _________ _______________________
Never _________ _________ _______________________
(f) For individual Subscribers, do you expect your current level of income to
significantly decrease in the foreseeable future:
YES |_| NO |_|
(g) For trust, corporate, partnership and other institutional Subscribers, do
you expect your total assets to significantly decrease in the foreseeable
future:
YES |_| NO |_|
(h) For all Subscribers, do you have any other investments or contingent
liabilities which you
20
<PAGE>
reasonably anticipate could cause you to need sudden cash requirements in excess
of cash readily available to you:
YES |_| NO |_|
(i) For all Subscribers, are you familiar with the risk aspects and the
non-liquidity of investments such as the securities for which you seek to
subscribe?
YES |_| NO |_|
(j) For all Subscribers, do you understand that there is no guarantee of
financial return on this investment and that you run the risk of losing your
entire investment?
YES |_| NO |_|
7.3 MANNER IN WHICH TITLE IS TO BE HELD. (circle one)
(a) Individual Ownership
(b) Community Property
(c) Joint Tenant with Right of Survivorship (both parties
must sign)
(d) Partnership*
(e) Tenants in Common
(f) Company*
(g) Trust*
(h) Other
*If Units are being subscribed for by an entity, the attached Certificate
of Signatory must also be completed.
7.4 NASD AFFILIATION.
Are you affiliated or associated with an NASD member firm (please check one):
YES |_| NO |_|
If Yes, please describe:
*If Subscriber is a Registered Representative with an NASD member firm, have the
following acknowledgment signed by the appropriate party:
The undersigned NASD member firm acknowledges receipt of the notice required by
Article 3, Sections 28(a) and (b) of the Rules of Fair Practice.
21
<PAGE>
______________________________
Name of NASD Member Firm
By:___________________________
Authorized Officer
Date:_________________________
7.5 The undersigned is informed of the significance to the Company of the
foregoing representations and answers contained in the Confidential Investor
Questionnaire contained in this Section 7 and such answers have been provided
under the assumption that the Company will rely on them.
7.6 The undersigned (a) represents that it has read and understands the
Agreement, (b) represents that the answers contained in the Confidential
Investor Questionnaire contained in this Section 7 are complete and accurate,
and (c) agrees that it will notify the Company at any time on or prior to the
Final Closing Date in the event that the representations and warranties in this
Agreement shall cease to be true, accurate and complete.
22
<PAGE>
[Signature Page]
NUMBER OF UNITS ______ X $3,000 =____________ (the "Purchase Price")
______________________________ ____________________________________
Signature Signature (if purchasing jointly)
______________________________ ____________________________________
Name Typed or Printed Name Typed or Printed
______________________________ ____________________________________
Entity Name Entity Name
______________________________ ____________________________________
Address Address
______________________________ ____________________________________
City, State and Zip Code City, State and Zip Code
______________________________ ____________________________________
Telephone-Business Telephone--Business
______________________________ ____________________________________
Telephone-Residence Telephone--Residence
______________________________ ____________________________________
Facsimile-Business Facsimile--Business
______________________________ ____________________________________
Facsimile-Residence Facsimile--Residence
______________________________ ____________________________________
Tax ID # or Social Security # Tax ID # or Social Security #
Name in which securities should be issued:___________________________
Dated ____________________, 1999
23
<PAGE>
This Subscription Agreement is agreed to and accepted as of _____________
1999.
CONVERSION TECHNOLOGIES
INTERNATIONAL, INC.
By:___________________________________
Name: Eckardt C. Beck
Title: Acting President and CEO
24
<PAGE>
CERTIFICATE OF SIGNATORY
(To be completed if Units are
being subscribed for by an entity)
I,__________________________, am the ___________________________ of
_____________________________ (the "Entity").
I certify that I am empowered and duly authorized by the Entity to execute
and carry out the terms of the Subscription Agreement and to purchase and hold
the Units, and certify further that the Subscription Agreement has been duly and
validly executed on behalf of the Entity and constitutes a legal and binding
obligation of the Entity.
IN WITNESS WHEREOF, I have set my hand this _____ day of _________ 1999.
___________________________________
(Signature)
25
<PAGE>
EXHIBIT A
WIRE TRANSFER INSTRUCTIONS
Wire transfers should be made to the account of Graham & James LLP, the escrow
agent:
Citibank, N.A.
New York, New York
Account Number: 37069829
ABA Routing Number: 021000089
For the account of : "Conversion Technologies International, Inc. Escrow"
Name of Subscriber: [Insert Investor Name]
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD,
PLEDGED, HYPOTHECATED, ASSIGNED OR TRANSFERRED EXCEPT (i) PURSUANT TO A
REGISTRATION STATEMENT UNDER THE ACT WHICH HAS BECOME EFFECTIVE AND IS CURRENT
WITH RESPECT TO SUCH SECURITIES, OR (ii) PURSUANT TO A SPECIFIC EXEMPTION FROM
REGISTRATION UNDER THE ACT BUT ONLY UPON A HOLDER HEREOF FIRST HAVING OBTAINED
THE WRITTEN OPINION OF COUNSEL TO THE COMPANY, OR OTHER COUNSEL REASONABLY
ACCEPTABLE TO THE COMPANY, THAT THE PROPOSED DISPOSITION IS CONSISTENT WITH ALL
APPLICABLE PROVISIONS OF THE ACT AS WELL AS ANY APPLICABLE "BLUE SKY" OR SIMILAR
STATE SECURITIES LAW.
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
CONVERTIBLE PROMISSORY NOTE DUE SEPTEMBER 1, 1999
______, 1999
FOR VALUE RECEIVED, Conversion Technologies International, Inc., a
Delaware corporation (the "Company"), hereby promises to pay to The Aries Master
Fund, a Cayman Island Exempted Company or its registered assigns (the "Holder"),
the principal amount of __________________ Dollars ($_______) (the "Principal
Amount"), and to pay interest thereon at the rate of 12% per annum. Principal
and accrued interest shall be due and payable on the Maturity Date (as defined
in Section 1 hereof) unless this Note is converted in accordance with Section 2
hereof. Payments will be made to the office of Maker in lawful money of the
United States of America. All references to dollars are to U.S. dollars.
1. Maturity. Unless converted in accordance with Section 2 hereof,
the Principal Amount of this Note, together with accrued interest thereon, shall
be due and payable on the earlier of (i) September 1, 1999, or (ii) the
completion of equity financings or other transactions that generate an aggregate
amount equal to or greater than $2,790,000 for the Company (the "Maturity
Date").
2. Optional Conversion. Upon the occurrence of the Conversion Event
(as defined below), the Principal Amount of, and accrued and unpaid interest on
this Note, at the option of the Holder, is subject to conversion into equity
securities ("Equity Securities") of either (i) the Company or (ii) Advanced
Particle Technologies, Inc., a Delaware corporation and a wholly-owned
subsidiary of the Company ("APT"), subject to the terms and conditions set forth
in Sections 2(a) - (e) hereof. The "Conversion Event" shall mean either (i) the
failure of the Company to raise an aggregate of $1,500,000 by April 1, 1999,
through the closing of an equity offering or otherwise or (ii) an Event of
Default as such term is defined in Section 4 hereof. Notwithstanding the first
sentence hereof, if the Conversion Event occurs, on or subsequent to April 1,
1999 all, but not less than all, of the outstanding Principal Amount of, and
accrued interest on this Note, may, at the discretion of the Holder, be
converted into Equity Securities of
<PAGE>
the Company or exchanged for Equity Securities of APT, subject to the terms and
conditions set forth in Section 2(a) - (e) hereof.
(a) Conversion into Company Shares. In the event that the Holder
exercises its option to convert the outstanding Principal Amount, and the
accrued and unpaid interest on this Note, into shares of the Equity Securities
of the Company, the number of Equity Securities into which this Note shall or
may be converted, as the case may be, shall be determined by dividing the sum of
the Principal Amount plus the accrued and unpaid interest on this Note by the
Conversion Price (as defined in this Section 2(a)). Upon such conversion, the
Principal Amount of, and accrued interest on, this Note shall be discharged. The
"Conversion Price," when determined, will be equal to the thirty day moving
average of the price per share, as quoted on the Pink Sheets(R), a quotation
medium operated by the National Quotation Bureau, LLC, of the Equity Securities
of the Company for the thirty day period immediately preceding the date of
conversion.
(b) Exchange into APT Shares. In the event that the Holder exercises
its option to exchange the outstanding Principal Amount, and the accrued and
unpaid interest on this Note, into shares of APT, the number of Equity
Securities into which this Note shall or may be exchanged, as the case may be,
shall be equal to 10% of the issued and outstanding shares of the common stock
of APT, par value $.01 per share, as of the date of such exercise. Upon such
exchange, the Principal Amount of, and accrued interest on, this Note shall be
discharged.
(c) Method of Conversion; Issuance of Underlying Securities. The
Company shall, following the occurrence of the Conversion Event and upon
presentment by the Holder of this Note to the Company, promptly issue and
deliver to the Holder certificates for the appropriate number of securities to
which the Holder shall be entitled as aforesaid.
(d) Merger. In case of any consolidation or merger of the Company
with any other corporation, limited liability company or any other entity (each
such transaction, a "Merger"), the corporation formed by the Merger shall
succeed to the obligations, covenants, stipulations, promises and the agreements
contained in this Note. In the event of a Merger, the Company shall make
appropriate provisions so that the Holder shall have the right thereafter to
convert this Note into the kind and amount of securities receivable upon such
Merger by a Holder of a number of securities into which this Note might have
been converted upon the Holder's election under either Section 2(a) or 2(b)
hereof had it been so converted immediately prior to a Merger. The above
provisions shall similarly apply to successive Mergers.
(e) Elimination of Fractional Interests. Neither the Company nor APT
shall be required to issue certificates representing fractions of Equity
Securities on the conversion of this Note, nor shall it be required to issue
scrip or pay cash in lieu of fractional interests, it being the intent of the
parties that all fractional interests shall be rounded to the nearest whole
share or security upon conversion of this Note directly into Equity Securities.
2
<PAGE>
3. Prepayment. The Company may at any time, upon thirty (30) days
prior written notice to the Holder, prepay in whole or part the principal sum,
plus accrued interest to date of payment, of this Note, without penalty or
premium. All sums paid hereon shall be applied first to accrued but unpaid
interest on this Note and the balance, if any, to the reduction of the principal
hereof. This Note shall not be due and payable until the Maturity Date. Once the
Maturity Date has been reached, all amounts evidenced by this Note shall be due
and payable.
4. Events of Default. Each of the following shall constitute an
"Event of Default" under this Note:
(a) The Company shall fail to pay any amount under this Note when
the same shall become due and payable, whether at maturity or by acceleration or
otherwise;
(b) (i) the Company shall commence any action (a) under any law
relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking
to have an order for relief entered with respect to the Company or its debts; or
(b) seeking appointment of a custodian, receiver or similar official for the
Company or any substantial part of its property; or (ii) any action of a nature
referred to above shall be commenced against the Company and results in an order
for relief or is not dismissed, discharged or fully bonded within 30 days; or
(iii) there shall be commenced against the Company any action seeking
attachment, execution or similar process against any substantial part of the
Company's property, which action is not within 30 days discharged or stayed or
fully bonded; or (iv) the Company shall, by act or omission, indicate its
consent to or acquiescence in any of the foregoing, without regard to the grace
periods set forth above; or (v) the Company shall be unable, or admit in writing
inability, to pay the Company's debts as they become due; or (vi) the Company
shall transfer or conceal its property with intent to hinder, delay or defraud
any creditors or to benefit any class of creditors or creditors generally or
shall suffer for 30 days or longer while insolvent any lien on the Company's
property resulting from judicial proceedings; and
(c) the dissolution or other winding up of the Company.
5. Remedies upon Events of Default. Upon the occurrence of an Event
of Default:
(a) the entire principal amount of, and all accrued and unpaid
interest on, this Note shall automatically become immediately due and payable
without presentment, demand, protest or other formalities of any kind, all of
which are expressly waived by the Company;
(b) additional interest shall begin to accrue, and shall be
considered immediately due and payable, on the unpaid principal amount of this
Note at the rate of 18% per annum and shall continue to accrue until the initial
interest and additional interest is paid; and
(c) the Holder may take any action available to it hereunder or at
law or in equity or by statute or otherwise, including, without limitation, the
right to foreclosure on assets or convert into shares of the common stock of the
Company or exchange for shares of the common stock of APT.
3
<PAGE>
6. Representations. The Company hereby represents and warrants that
(i) it holds all of the issued and outstanding capital stock of APT and (ii) in
the event that the Holder exercises its option pursuant to Section 2(b) hereof,
receiving 10% of the issued and outstanding common stock of APT, and that it
exercises its Repayment Right pursuant to Section 2(a)(ii) of each of a series
of 12% Senior Secured Notes in the aggregate principal amount of $1,290,000 made
by the Company in favor of the Holder, receiving 90% of the issued and
outstanding common stock of APT, that the Holder will hold all of the capital
stock outstanding of APT and that the Company will not retain any such shares of
the capital stock of APT. The Company further represents and warrants that there
is outstanding no security or other instrument which by its terms is convertible
into or exchangeable for capital stock of APT.
7. Miscellaneous.
(a) Except as otherwise hereinabove expressly provided, upon an
Event of Default the Company hereby waives diligence, demand, protest,
presentment and all notices (whether of nonpayment, dishonor, protest,
acceleration or otherwise) and consents to acceleration of the time of payment
and to surrender, substitution or any other action or inaction with respect to
security and to forbearance and to other indulgence, all without notice. Failure
of Holder to assert any right herein shall not be deemed a waiver thereof.
(b) This Note may be endorsed or assigned in whole or in part by
Holder without the consent of Maker.
(c) This Note shall be governed by and construed in accordance with
the laws of the State of New York applicable to contracts made and to be
performed wholly within such State.
IN WITNESS WHEREOF, the Company has caused this Note to be executed and
delivered by its duly authorized representative as of the date first written
above.
CONVERSION TECHNOLOGIES
INTERNATIONAL, INC.
By: __________________________________
Name:
Title:
4
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD,
PLEDGED, HYPOTHECATED, ASSIGNED OR TRANSFERRED EXCEPT (i) PURSUANT TO A
REGISTRATION STATEMENT UNDER THE ACT WHICH HAS BECOME EFFECTIVE AND IS CURRENT
WITH RESPECT TO SUCH SECURITIES, OR (ii) PURSUANT TO A SPECIFIC EXEMPTION FROM
REGISTRATION UNDER THE ACT BUT ONLY UPON A HOLDER HEREOF FIRST HAVING OBTAINED
THE WRITTEN OPINION OF COUNSEL TO THE COMPANY, OR OTHER COUNSEL REASONABLY
ACCEPTABLE TO THE COMPANY, THAT THE PROPOSED DISPOSITION IS CONSISTENT WITH ALL
APPLICABLE PROVISIONS OF THE ACT AS WELL AS ANY APPLICABLE "BLUE SKY" OR SIMILAR
STATE SECURITIES LAW.
CONVERSION TECHNOLOGIES INTERNATIONAL, INC.
CONVERTIBLE PROMISSORY NOTE DUE SEPTEMBER 1, 1999
___________, 1999
FOR VALUE RECEIVED, Conversion Technologies International, Inc., a
Delaware corporation (the "Company"), hereby promises to pay to The Aries
Domestic Fund, L.P. or its registered assign (the "Holder"), the principal
amount of __________________ Dollars ($______) (the "Principal Amount"), and to
pay interest thereon at the rate of 12% per annum. Principal and accrued
interest shall be due and payable on the Maturity Date (as defined in Section 1
hereof) unless this Note is converted in accordance with Section 2 hereof.
Payments will be made to the office of Maker in lawful money of the United
States of America. All references to dollars are to U.S. dollars.
1. Maturity. Unless converted in accordance with Section 2 hereof,
the Principal Amount of this Note, together with accrued interest thereon, shall
be due and payable on the earlier of (i) September 1, 1999, or (ii) the
completion of equity financings or other transactions that generate an aggregate
amount equal to or greater than $2,790,000 for the Company (the "Maturity
Date").
2. Optional Conversion. Upon the occurrence of the Conversion Event
(as defined below), the Principal Amount of, and accrued and unpaid interest on
this Note, at the option of the Holder, is subject to conversion into equity
securities ("Equity Securities") of either (i) the Company or (ii) Advanced
Particle Technologies, Inc., a Delaware corporation and a wholly-owned
subsidiary of the Company ("APT"), subject to the terms and conditions set forth
in Sections 2(a) - (e) hereof. The "Conversion Event" shall mean either (i) the
failure of the Company to raise an aggregate of $1,500,000 by April 1, 1999,
through the closing of an equity offering or otherwise or (ii) an Event of
Default as such term is defined in Section 4 hereof. Notwithstanding the first
sentence hereof, if the Conversion Event occurs, on or subsequent to April 1,
1999 all, but not less than all, of the outstanding Principal Amount of, and
accrued interest on this Note, may, at the discretion of the Holder, be
converted into Equity Securities of
<PAGE>
the Company or exchanged for Equity Securities of APT, subject to the terms and
conditions set forth in Section 2(a) - (e) hereof.
(a) Conversion into Company Shares. In the event that the Holder
exercises its option to convert the outstanding Principal Amount, and the
accrued and unpaid interest on this Note, into shares of the Equity Securities
of the Company, the number of Equity Securities into which this Note shall or
may be converted, as the case may be, shall be determined by dividing the sum of
the Principal Amount plus the accrued and unpaid interest on this Note by the
Conversion Price (as defined in this Section 2(a)). Upon such conversion, the
Principal Amount of, and accrued interest on, this Note shall be discharged. The
"Conversion Price," when determined, will be equal to the thirty day moving
average of the price per share, as quoted on the Pink Sheets(R), a quotation
medium operated by the National Quotation Bureau, LLC, of the Equity Securities
of the Company for the thirty day period immediately preceding the date of
conversion.
(b) Exchange into APT Shares. In the event that the Holder exercises
its option to exchange the outstanding Principal Amount, and the accrued and
unpaid interest on this Note, into shares of APT, the number of Equity
Securities into which this Note shall or may be exchanged, as the case may be,
shall be equal to 10% of the issued and outstanding shares of the common stock
of APT, par value $.01 per share, as of the date of such exercise. Upon such
exchange, the Principal Amount of, and accrued interest on, this Note shall be
discharged.
(c) Method of Conversion; Issuance of Underlying Securities. The
Company shall, following the occurrence of the Conversion Event and upon
presentment by the Holder of this Note to the Company, promptly issue and
deliver to the Holder certificates for the appropriate number of securities to
which the Holder shall be entitled as aforesaid.
(d) Merger. In case of any consolidation or merger of the Company
with any other corporation, limited liability company or any other entity (each
such transaction, a "Merger"), the corporation formed by the Merger shall
succeed to the obligations, covenants, stipulations, promises and the agreements
contained in this Note. In the event of a Merger, the Company shall make
appropriate provisions so that the Holder shall have the right thereafter to
convert this Note into the kind and amount of securities receivable upon such
Merger by a Holder of a number of securities into which this Note might have
been converted upon the Holder's election under either Section 2(a) or 2(b)
hereof had it been so converted immediately prior to a Merger. The above
provisions shall similarly apply to successive Mergers.
(e) Elimination of Fractional Interests. Neither the Company nor APT
shall be required to issue certificates representing fractions of Equity
Securities on the conversion of this Note, nor shall it be required to issue
scrip or pay cash in lieu of fractional interests, it being the intent of the
parties that all fractional interests shall be rounded to the nearest whole
share or security upon conversion of this Note directly into Equity Securities.
2
<PAGE>
3. Prepayment. The Company may at any time, upon thirty (30) days
prior written notice to the Holder, prepay in whole or part the principal sum,
plus accrued interest to date of payment, of this Note, without penalty or
premium. All sums paid hereon shall be applied first to accrued but unpaid
interest on this Note and the balance, if any, to the reduction of the principal
hereof. This Note shall not be due and payable until the Maturity Date. Once the
Maturity Date has been reached, all amounts evidenced by this Note shall be due
and payable.
4. Events of Default. Each of the following shall constitute an
"Event of Default" under this Note:
(a) The Company shall fail to pay any amount under this Note when
the same shall become due and payable, whether at maturity or by acceleration or
otherwise;
(b) (i) the Company shall commence any action (a) under any law
relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking
to have an order for relief entered with respect to the Company or its debts; or
(b) seeking appointment of a custodian, receiver or similar official for the
Company or any substantial part of its property; or (ii) any action of a nature
referred to above shall be commenced against the Company and results in an order
for relief or is not dismissed, discharged or fully bonded within 30 days; or
(iii) there shall be commenced against the Company any action seeking
attachment, execution or similar process against any substantial part of the
Company's property, which action is not within 30 days discharged or stayed or
fully bonded; or (iv) the Company shall, by act or omission, indicate its
consent to or acquiescence in any of the foregoing, without regard to the grace
periods set forth above; or (v) the Company shall be unable, or admit in writing
inability, to pay the Company's debts as they become due; or (vi) the Company
shall transfer or conceal its property with intent to hinder, delay or defraud
any creditors or to benefit any class of creditors or creditors generally or
shall suffer for 30 days or longer while insolvent any lien on the Company's
property resulting from judicial proceedings; and
(c) the dissolution or other winding up of the Company.
5. Remedies upon Events of Default. Upon the occurrence of an Event
of Default:
(a) the entire principal amount of, and all accrued and unpaid
interest on, this Note shall automatically become immediately due and payable
without presentment, demand, protest or other formalities of any kind, all of
which are expressly waived by the Company;
(b) additional interest shall begin to accrue, and shall be
considered immediately due and payable, on the unpaid principal amount of this
Note at the rate of 18% per annum and shall continue to accrue until the initial
interest and additional interest is paid; and
(c) the Holder may take any action available to it hereunder or at
law or in equity or by statute or otherwise, including, without limitation, the
right to foreclosure on assets or convert into shares of the common stock of the
Company or exchange for shares of the common stock of APT.
3
<PAGE>
6. Representations. The Company hereby represents and warrants that
(i) it holds all of the issued and outstanding capital stock of APT and (ii) in
the event that the Holder exercises its option pursuant to Section 2(b) hereof,
receiving 10% of the issued and outstanding common stock of APT, and that it
exercises its Repayment Right pursuant to Section 2(a)(ii) of each of a series
of 12% Senior Secured Notes in the aggregate principal amount of $1,290,000 made
by the Company in favor of the Holder, receiving 90% of the issued and
outstanding common stock of APT, that the Holder will hold all of the capital
stock outstanding of APT and that the Company will not retain any such shares of
the capital stock of APT. The Company further represents and warrants that there
is outstanding no security or other instrument which by its terms is convertible
into or exchangeable for capital stock of APT.
7. Miscellaneous.
(a) Except as otherwise hereinabove expressly provided, upon an
Event of Default the Company hereby waives diligence, demand, protest,
presentment and all notices (whether of nonpayment, dishonor, protest,
acceleration or otherwise) and consents to acceleration of the time of payment
and to surrender, substitution or any other action or inaction with respect to
security and to forbearance and to other indulgence, all without notice. Failure
of Holder to assert any right herein shall not be deemed a waiver thereof.
(b) This Note may be endorsed or assigned in whole or in part by
Holder without the consent of Maker.
(c) This Note shall be governed by and construed in accordance with
the laws of the State of New York applicable to contracts made and to be
performed wholly within such State.
IN WITNESS WHEREOF, the Company has caused this Note to be executed and
delivered by its duly authorized representative as of the date first written
above.
CONVERSION TECHNOLOGIES
INTERNATIONAL, INC.
By: _____________________________________
Name:
Title:
4
LEASE AGREEMENT
THIS AGREEMENT made as of this first day of Sept 17, 1999, by and between
DUNKIRK INTERNATIONAL GLASS & CERAMICS CORP., 181 Stegelske Avenue, P.O. Box
1202, Dunkirk, New York 14048, (hereinafter referred to as "Landlord") and RED
WING COMPANY, INC., 196 Newton Avenue, Fredonia, New York 14063, (hereinafter
referred to as "Tenant"),
WITNESSETH:
WHEREAS, the Landlord is the owner of that certain parcel of land, with
improvements, known as 181 Stegelske Avenue, Dunkirk, New York 14048, and
WHEREAS, the Landlord desires to lease unto the Tenant under the terms and
conditions hereinafter set forth, a portion of 181 Stegelske Avenue, Dunkirk,
New York consisting of approximately thirty-three thousand square feet in the
lower west wing of the facility as further described in Schedule "A" attached
hereto,
NOW, THEREFORE, the parties hereto expressly agree as follows:
1. The Landlord, for and in consideration of the rents, covenants and
agreements hereinafter specified to be paid, kept and performed by the Tenant,
hereby leases a portion of the property located in the City of Dunkirk, County
of Chautauqua, and State of New York, consisting of the lower west wing of the
premises at 181 Stegelske Avenue, Dunkirk, New York, (hereinafter the "Leased
Premises") to the Tenant for the purpose of storage of food products and
packaging.
<PAGE>
-2-
2. The Landlord covenants and agrees with the Tenant:
(a) That the title to the Leased Premises is vested in fee simple in
the said Landlord.
(b) That the Landlord has the lawful authority to lease that portion
of the building, together with the improvements thereon, for the term herein set
forth and for any renewals herein provided for.
(c) That the Leased Premises are now zoned for the purposes
described in paragraph 1.
(d) This lease is assignable by the Tenant upon the written consent
of the Landlord, which consent shall not be unreasonably withheld.
3. The term of this Lease shall be for one (1) year, commencing upon
receipt by Tenant of certification permitting food products and packaging to be
stored upon the premises ("Commencement Date") and terminating one year
therefrom, unless sooner terminated by the Landlord or Tenant as herein
provided. The annual rental for the one-year term of the lease shall be Three
Dollars per square foot, payable in monthly installments of eight thousand two
hundred fifty 00/100 Dollars ($8,250.00), per month, in advance of the first
(1st) day of each month. Unless either party notifies the other ninety (90) days
prior to the end of the term that it elects to terminate, this lease shall
<PAGE>
-3-
continue for an additional year under the same terms and conditions, including
the continuing renewal provisions.
4. The Tenant shall pay to the Landlord a security deposit consisting of
the first and last month's rent. The Landlord shall grant the Tenant the right
to enter upon the premises for the purposes of removing the storage bin walls
and for cleaning in order to receive the necessary certification for storage of
food products. The costs of the removal of the storage bin walls and cleaning
shall be deducted from the amount of the security deposit upon submission to the
Landlord of the invoices for this work. In the event the cost of removal and
cleaning is greater than the security deposit, the excess shall act as a credit
against rental payments described herein.
5. All charges, costs and expenses which the Tenant is required to pay
hereunder, together with all interest and penalties that may accrue thereon in
the event of the Tenant's failure to pay such amounts, and all damages, costs
and expenses which the Landlord may incur by reason of any default of the Tenant
or failure on the Tenant's part to comply with the terms of this Lease, shall be
deemed to be additional rent, and in the event of nonpayment by the Tenant, the
Landlord shall have all the rights and remedies with respect thereto as the
Landlord has for the nonpayment of the basic rent.
<PAGE>
-4-
6. (a) The Landlord shall pay premiums for insurance coverage on the
Leased Premises, including fire and extended coverage. The expense of insuring
the contents of the demised premises shall be borne by the Tenant.
(b) The Tenant shall pay all utility expenses and premiums for
public liability insurance. Such public liability insurance shall name Landlord
as an additional insured at Tenant's sole expense. It is understood there is
currently no water facilities on the Leased Premises.
(c) The Tenant shall furnish to the Landlord official receipts or
other satisfactory proof of payment of such utility and insurance expenses,
within a reasonable time after demand by the Landlord.
(d) The Landlord appoints the Tenant the attorney-in-fact of the
Landlord for sole purpose of making all payments to be made by the Tenant
pursuant to any of the provisions of this Lease to persons other than the
Landlord. In case any person to which any sum is directly payable by the Tenant
under any of the provisions of this Lease shall refuse to accept payment of such
sum from the Tenant, the Tenant shall thereupon give written notice of such fact
to the Landlord and shall pay such sum
<PAGE>
-5-
directly to the Landlord, who shall thereupon pay such sum to such person.
(e) The Tenant, at its own cost, may tie-in and use the on-site gas
well as an energy source for heating the Leased Premises. The gas is to be
provided by the Landlord, at no cost to the Tenant, provided the temperature be
maintained at 45(degrees) F. Additionally, if the Tenant is interested in
utilizing this gas well for heating other areas of the Leased Premises, the
Landlord agrees to negotiate with Tenant a cost for the gas to be provided at a
competitive rate.
The Tenant shall comply with all laws and regulations of the
Federal, State, County and Municipal authorities applicable to the business to
be conducted by the Tenant in the Leased Premises.
7. (a) The Landlord shall, at its own expense, make all necessary
structural repairs and replacements to the Leased Premises and to the pipes,
plumbing system, window glass, and fixtures used in connection with the Leased
Premises. If the Landlord is unable, within 30 days of notice, to perform the
necessary repairs and replacements described above, Tenant is authorized to
perform the necessary repairs and replacements and take a credit against the
rent for the cost of those repairs and replacements.
<PAGE>
-6-
(b) Prior to the effective date of this lease, Tenant shall have the
right to inspect the premises upon reasonable notice to the Landlord, which
inspection shall include the pipes, plumbing system, window glass and fixtures
used in connection with the Leased Premises.
(c) The Parties acknowledge that the Tenant shall be permitted to
store items listed on Exhibit "B" attached hereto, which at all times shall be
owned by the Tenant. The Exhibit attached is not intended to be exclusive.
8. (a) In the event of damage to or destruction of the Leased premises by
fire or other casualty, the Landlord, at its sole expense, shall promptly
restore the Leased Premises as nearly as possible to its condition prior to such
damage or destruction; provided, however, that all insurance proceeds received
by the Landlord pursuant to the provisions of this Lease, less the cost, if any,
of such recovery shall be held in trust and applied by the Landlord to the
payment of such restoration as such restoration progresses.
(b) If at any time within three (3) months prior to the end of the
initial term or any extended term, the Leased Premises are completely destroyed
or so damaged by fire or other casualty covered by insurance as to render it
unfit for use as intended, and repair or restoration is not economically
feasible, the Landlord or the Tenant may terminate this Lease on notice of
<PAGE>
-7-
at least ten (10) days and not more than thirty (30) days. Such notice shall be
given within sixty (60) days after the date of such damage or destruction. If
the Lease shall so terminate, all basic and additional rent shall be apportioned
to the date of termination and all insurance proceeds shall belong to the
Landlord. If the tenant and the Landlord do not agree on the economic
feasibility of repairing or restoring the Leased Premises, such question shall
be arbitrated as hereinafter provided.
(c) If the Lease is not so terminated and the proceeds of insurance
are insufficient to pay the full cost of repair or restoration, the Landlord
shall pay the deficiency. If the insurance proceeds exceed such cost, the excess
shall be paid to the Landlord.
(d) Any disbursement of insurance proceeds by a holder of a
mortgage, or security interest shall be deemed to have been made by the
Landlord. If any holder of a deed of trust, mortgage, or security interest shall
refuse to disburse any portion of insurance proceeds to which the Tenant is
entitled, the Landlord shall provide an equivalent sum from other sources.
9. (a) If the whole or part of the Leased Premises shall be taken or
condemned by any competent authority for any public use or purpose during the
term of this Lease, or if such authority shall take title to the Leased Premises
in lieu of
<PAGE>
-8-
condemnation, tenant reserves the right to claim and prosecute its claims in all
appropriate courts and agencies for an award of damages for the taking, based
upon its leasehold interest and ownership of leasehold improvements,
interruption of business, moving expenses and other damages available under the
applicable law, without impairing any rights of Landlord for the taking of or
injury to the reversion.
(b) In the event that a part of the Leased Premises shall be taken
or condemned or title be transferred in lieu of condemnation which, in the
reasonable judgment of Tenant, is sufficient to render the remaining portion
unsuitable for its continued use or occupancy, or in the event that a partial
taking shall result in cutting off direct access from the Leased Premises to any
adjacent public street, highway or road, or which results in the parking lot
area being rendered too small for adequate parking by the Tenant's customers or
for the safe and easy maneuvering of Tenant's vehicles, then and in any such
event, Tenant may at any time either prior to or within a period of sixty (60)
days after the date when possession of the relevant Premises shall be required
by the condemning authority, elect to terminate this Lease. In the event that
Tenant fails to exercise its option to terminate this Lease then this Lease and
Permit shall continue in effect with respect to the portion of the Premises not
taken except that the annual rent shall be reduced
<PAGE>
-9-
proportionately. If less than the whole or less than substantially all of the
building on the Leased Premises shall be taken in such proceeding, and the
Tenant shall not elect to terminate this lease, the Landlord shall, with
reasonable dispatch, repair the remaining portion of the Leased Premises (if
there shall then be a building or part of a building on such remaining portion
of the Leased Premises) so as to restore such building as a building complete in
itself, but the Landlord shall not be obligated to expend thereon more than the
sum allowed to the Landlord in such condemnation proceeding for damage to the
building, less all expenses incurred by the Landlord in such proceeding;
provided, however, that if the expense of such restoration would be greater than
the sum allowed to the Landlord, less such expenses in the condemnation
proceeding, then the Landlord shall have an option, for a period of 30 days
after such partial taking, within which to decide whether to make the
restoration or terminate this Lease. If within such 30-day period, the Landlord
shall give written notice to the Tenant of termination, this Lease and the term
hereof shall terminate and expire of the last day of the calendar month
following the month in which such notice shall be given and the net rent,
additional rent, and other sums or charges in this Lease provided to be paid by
the Tenant shall be apportioned and paid to the date of such termination;
provided, however, that if the Tenant shall agree in
<PAGE>
-10-
writing, within twenty (20) days after receiving such notice of termination from
the Landlord, to pay the difference by which the cost of such restoration
exceeds the sum allowed to the Landlord in such condemnation proceeding, less
such expenses, then the Landlord's notice of termination and right to terminate
hereunder shall cease and Landlord shall make such restoration an hereinbefore
required.
10. In the event the Tenant shall default in the payment of rent or any
other sums payable by the Tenant herein, and such default shall continue for a
period of thirty (30) days, or if the Tenant shall default in the performance of
any other covenants or agreements of this Lease and such default shall continue
for thirty (30) days after written notice thereof, or if the Tenant shall become
bankrupt or insolvent or any debtor proceedings be taken by or against the
Tenant, then and in addition to any and all other legal remedies and rights, the
Landlord may declare this Lease terminated or Landlord may retake possession of
the Leased Premises and relet the same upon commercially reasonable terms
without termination, in which later event the Tenant covenants and agrees to pay
any deficiency after Tenant is credited with the rent thereby obtained less all
reasonable repairs and expenses (including the expense of obtaining possession).
The Tenant, for and on behalf of itself and all persons claiming through or
under the Tenant, also waives
<PAGE>
-11-
any right of redemption or re-entry or repossession or to restore the operation
of this Lease in case the Tenant shall be dispossessed by a judgment or by
warrant of any court or judge or in case of re-entry or repossession by the
Landlord.
11. Tenant agrees, at its sole expense, to maintain comprehensive public
liability insurance covering liability of the Tenant to third parties arising
out of use of the demised premises during the term of this Lease in the minimum
amount of $1,000,000 including property damage. The Landlord shall, at its
exclusive expense. procure and maintain policies of fire, extended coverage and
casualty insurance covering the building and equipment of Landlord in their
entirety in an amount at least equivalent to the replacement value thereof,
which amount is agreed as of the date hereof to be $________________ for the
building.
Certificates evidencing proof of the foregoing insurance
requirements shall be exchanged between the parties hereto no later than the
Commencement Date.
12. If the Tenant shall default in the performance of any of the terms and
covenants in this Lease contained, or in the event that the Tenant shall become
insolvent or bankrupt, or shall make an assignment for the benefit of creditors,
the Landlord may give ten (10) days' notice to the Tenant to cure any default,
and at the expiration of such ten (10) days if the
<PAGE>
-12-
default is not cured, the term of this Lease shall terminate as if it were the
expiration of the original term. However, the Tenant shall nevertheless be
responsible for the payment of all rents due hereunder through the date of
expiration of the original lease term.
13. The failure of either party to insist in any one or more instances
upon a strict performance of any of the terms, covenants and conditions of this
Agreement or to exercise any option and make any election herein contained and
provided for shall not be construed as a waiver or a relinquishment for the
future of such terms, covenants and conditional options or elections and the
same shall continue in full force and effect.
14. This Agreement contains the entire agreement between the parties
hereto and modifications of this Agreement or waiver or consent hereunder shall
be valid or binding unless the same be in writing signed by the party or parties
to be bound and this provision shall apply to this paragraph as well as to all
other terms covenants and conditions of this Agreement.
15. This Agreement and all of its terms, covenants and conditions shall be
construed according to the laws of the State of New York.
16. This Agreement shall be binding upon the heirs, executors,
administrators, successors and assigns of the respective parties hereto as the
status of the parties require.
<PAGE>
-13-
17. Landlord shall hold Tenant harmless with respect to any actual or
consequential damages incurred by Tenant as a result of such default.
18. Tenant may, at its expense, cause this Lease Agreement, or a
memorandum thereof, to be recorded in the Chautauqua County Clerk's Office.
IN WITNESS WHEREOF, the parties hereto have caused this Lease Agreement to
be duly executed by the proper and necessary parties hereto the day and year
first above written.
DUNKIRK INTERNATIONAL GLASS &
CERAMICS CORP.
By: /s/ [ILLEGIBLE]
----------------------------------------
RED WING COMPANY, INC.
By: /s/ Thomas G. Wilkinson
----------------------------------------
EXEC. V.P. OPERATIONS
<PAGE>
SCHEDULE A
[LOGO] CONVERSION
------------
TECHNOLOGIES
John G. Murchie
Comptroller, CFO
Conversion Technologies International, Inc.
7 San Bartolo Drive, o St. Augustine, FL 32086
Office: 904-898-0503 o Fax 904-898-8791 o 800-273-2584
[GRAPHIC OMITTED]
<PAGE>
MEMORANDUM OF LEASE AGREEMENT
The undersigned, DUNKIRK INTERNATIONAL GLASS & CERAMICS CORP., 181
Stegelske Avenue, P.O. Box 1202, Dunkirk, New York 14048 ("Landlord") and RED
WING COMPANY, INC., 196 Newton Avenue, Fredonia, New York 14063, ("Tenant")
entered into a certain Lease Agreement ("Lease") for the lease of real property
dated as of Sept. 17, 1999 and executed on the date hereof.
Such Lease Agreement covers the real property ("Land"), including
approximately 33,000 square feet of the building, affixed or attached thereto
("Building"), as more particularly described in Schedule "A" attached hereto and
made a part hereof.
Such Lease Agreement provides for the rental of the Land, a portion
of the Building and fixtures by the Landlord and for the payment by the Tenant
of rent payable pursuant to such Lease over a lease term commencing Sept. 17,
1999 and expiring no later than Sept. 16, 1999 or such earlier date as is
permitted by the Lease, and all other costs and expenses due from the Tenant are
paid in full.
The Tenant has the option to renew the Lease for an additional year
under the same terms and conditions.
The Parties acknowledge that the Tenant shall be permitted to store
items listed on Exhibit "B" attached hereto, which at all times shall be owned
by the Tenant. The exhibit attached is not intended to be exclusive.
IN WITNESS WHEREOF, the Landlord and the Tenant have caused this
Memorandum of Lease Agreement to be executed in their respective names as of
Sept. 17, 1999.
DUNKIRK INTERNATIONAL GLASS
& CERAMICS CORP.
By /s/ John G. Murchie
------------------------------------
RED WING COMPANY, INC.
By /s/ Thomas G. Wilkinson
------------------------------------
EXEC. V.P. OPERATIONS
<PAGE>
STATE OF NEW YORK )
) ss:
COUNTY OF CHAUTAUQUA )
On the 19 day of OCTOBER, 1999, before me personally came JOHN G.
MURCHIE, to me known, who being by me duly sworn, did depose and say that he
resides at 7217 E. QUAKER ST., O.P., New York; that he is the CONTROLLER of
Dunkirk International Glass & Ceramics Corp., the corporation described in and
which executed the above instrument; and that he signed his name thereto by
authority of the Board of Directors of said corporation.
/s/ Angela M. Panella
-------------------------
Notary Public
ANGELA M. PANELLA
Notary Public, State of New York
Qualified in Erie County
My Commission Expires 04/19/2001
STATE OF NEW YORK )
) ss:
COUNTY OF CHAUTAUQUA )
On the 1st day of July, 1999, before me personally came Thomas G.
Wilkinson, to me known, who being by me duly sworn, did depose and say that he
resides at North East PA; that he is the Exec. V.P. of Operations of Red Wing
Company, Inc., the corporation described in and which executed the above
instrument; and that he signed his name thereto by authority of the Board of
Directors of said corporation.
/s/ Diana DiNoto
-------------------------
Notary Public
DIANA DINOTO
Notary Public, State of New York
No. 01D16043962
Qualified in Chautauqua County
Commission Expires May 22, 2001
<PAGE>
EXHIBIT "B"
The current plan to utilize the 33,000 sq. ft. section of the Dunkirk Ceramics
facility has the possibilities of storing the following:
o All finished goods
o All packaging materials
o Production equipment
o Concentrate drums
o Raw Materials
o Forklifts
o Empty pallets
o Dock plates
o Shrink wrap
o Wrapping machine
o Labels and T.E. seals
o Office equipment/furniture
o Other miscellaneous items
Exhibit 11
CONVERSION TECHNOLOGIES INTERNATIONAL, INC. AND SUBSIDIARIES
STATEMENT OF COMPUTATION OF NET (LOSS) PER SHARE
For the years ended June 30, 1999 and June 30, 1998
<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Loss before extraordinary item $ (2,105,748) $ (8,666,278)
Preferred Stock dividends (1,182,102) (3,032,318)
------------------------------
Loss before extraordinary item attributable to
common stockholders $ (3,287,850) $(11,698,596)
==============================
Weighted average number of
common shares outstanding 5,133,200 4,804,427
==============================
Loss per common share before
extraordinary item $ (0.64) $ (2.44)
==============================
Extraordinary item $ -- $ 6,425,004
==============================
Income per share from extraordinary item $ -- $ 1.34
==============================
Net loss $ (2,105,748) $ (2,241,274)
Preferred stock dividends (1,182,102) (3,032,318)
------------------------------
Net loss attributable to common stockholders $ (3,287,850) $ (5,273,592)
==============================
Net loss per common share $ (0.64) $ 1.10
==============================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-KSB
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 60,954
<SECURITIES> 0
<RECEIVABLES> 172,496
<ALLOWANCES> 68,146
<INVENTORY> 283,029
<CURRENT-ASSETS> 605,034
<PP&E> 1,772,053
<DEPRECIATION> 269,841
<TOTAL-ASSETS> 2,213,644
<CURRENT-LIABILITIES> 5,676,811
<BONDS> 1,528,085
0
546
<COMMON> 1,737
<OTHER-SE> (4,993,535)
<TOTAL-LIABILITY-AND-EQUITY> 2,213,644
<SALES> 1,119,482
<TOTAL-REVENUES> 1,128,274
<CGS> 1,250,762
<TOTAL-COSTS> 2,757,003
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 477,019
<INCOME-PRETAX> (2,105,748)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,105,748)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,105,748)
<EPS-BASIC> (0.64)
<EPS-DILUTED> (0.64)
</TABLE>
